Forbes magazine recently reported that in July the Vanguard group sent 170,000 customers a form letter innocuously labeled: “Change in beneficiary policy will help you simplify your planning.” A more candid heading would have been: “Warning! Unless you act, we’re about to change who gets your Individual Retirement Accounts when you die.”

Vanguard has decided that, as of September, 2007 (last month), it will require customers to use identical beneficiaries for all IRAs of the same type. All your IRAs holding money rolled from employer pension plans count as the same type and must have the same beneficiaries. Traditional IRAs, both pretax and aftertax, are a second type. Roth IRAs are a third.

If you’re one of 170,000 customers who now have different beneficiaries named for separate IRAs of the same type or different beneficiaries for different mutual funds within a single IRA, Vanguard will apply the newest beneficiary form to all your IRAs of one type–unless you contact Vanguard and direct otherwise. If two forms were submitted at the same time, Vanguard will treat the one it processed later as newer. This is crucial, since it’s the form–not your will–that determines who gets your IRAs.

 I commonly assist clients with planning where we might have two different IRA accounts, each naming a different beneficiary. In second marriage situations, for instance, one might name one’s spouse on one account and the children on another. The reason you might do this is to let each beneficiary achieve the maximum “stretch” on the minimum distribution withdrawals over the course of their lifetime after your death. Combining a spouse with a child might result in using the oldest (spouse’s) beneficiary’s life, which would harm the children.

Suppose that you’ve named your second spouse beneficiary of one IRA and your child primary beneficiary of another. If you don’t read your mail carefully, or were on vacation or in the hospital when the letter came, and you die without contacting Vanguard, one of your beneficiaries could be done out of his or her IRA inheritance.

I’ve never seen anything like this in my years of practicing estate planning law. I would say that it doesn’t surprise me. Cookie cutter mutual fund institutions aren’t really built for handling sophisticated estate planning techniques. They want a “one size fits all” approach. If you have a sophisticated estate plan, using a discount mutual fund company as your IRA custodian is a lot like someone who needs Nordstrom level service but instead decides to shop at Wal Mart.

Colin Kelton, the Vanguard official who signed the July letter, argues customers are getting adequate advance notice and will get a second letter in September alerting them that the beneficiary change has been made.

What if clients pick up the phone and ask to keep different beneficiaries for separate IRAs of the same type? In two customer service calls FORBES was told that’s impossible. “There’s no way to override the computer,” declared one rep to Forbes. He added that Vanguard is “a low-cost provider” and permitting different beneficiaries would increase its costs.

Kelton said that Vanguard might make an exception if a customer could show different beneficiaries were needed. But he couldn’t think of any examples where they would be, and those we offered–all cases where lawyers advise it–didn’t qualify, he said. What if you want to leave one IRA to charity and one to your kids or one to your kids from your first marriage and one to your current spouse? Kelton says a customer should indicate on the form the percentage each heir is to get and the executor of his estate can split the IRA up. I disagree with Kelton’s analysis.

The Internal Revenue Service has allowed such postmortem IRA splits since 2002. But the personal representative must meet strict deadlines. If, for example, an IRA going partly to charity isn’t split in time, other heirs lose the ability to stretch out payouts and tax deferral over their own lives.

 This is why I recommend establishing separate IRAs for separate beneficiaries before death. The Forbes article quotes esteemed IRA estate lawyer Natalie Choate of Boston, Massachusetts speculating that Vanguard could end up getting sued by beneficiaries who were unintentionally written out as beneficiaries. If you have IRAs at Vanguard, you might want to take a close look at your planning.