Thursday, September 4, 2014
Clients who pay large sums of money to have lawyers prepare their wills and trusts often complete their IRA beneficiary designations without seeking professional advice. Even worse, some forget to fill out these forms. Consequently, loved ones may get less than expected, while creditors or an ex-spouse inherit thousands from an IRA.
Because beneficiary designations affect who receives assets and how quickly funds must be withdrawn from the account, mistakes accelerate payments and heirs lose substantial tax advantages. “The IRS rules about designating beneficiaries are draconian. And when it comes to mistakes in these forms, the Service is rarely forgiving.”
To prevent this from happening keep in mind a few things. First, the beneficiary form must be on file with the custodian. Also, the beneficiary designation cannot be left blank, nor can it name a deceased person. When an IRA does not have a beneficiary, the financial institution looks to its own contract with the IRA owner to determine how the account will be distributed after the owner’s death and the terms of these agreement vary. Last, never name your estate as the beneficiary. Anytime an IRA passes to an estate, it opens a new set of problems including the inability to stretch out distributions.
See Wendy S. Goffe, When Bad Things Happen to Good People With IRAs, Forbes, Sept. 3, 2014.