Thursday, March 7, 2019
Sarah Brenner, director of retirement education for Ed Slott and Company, lays out some simple choices to make that can make an estate plan more efficient. The beneficiary designation form of IRAs is a document that can be overlooked by many clients as well as advisors that can lead to irreparable damage to a person's retirement as well as estate. “A beneficiary form is like a piece of paper: It’s free to fill out and people don’t take it seriously. That’s a huge problem. The beneficiary form is what determines how the retirement assets will pass to the next generation.”
- A Costly Mistake
- Incomplete, lost or poorly completed beneficiary forms can lead to loss in cash flow for the surviving spouse or next generation.
- Beware of Bad Advice
- “If you think something will be easy, don’t just delegate it down,” said Jeremy Rodriguez, an IRA analyst with Ed Slott & Company. A sole beneficiary can be liable for income tax rather than estate tax when it comes to taking a full distributed from an inherited IRA and then distributing it to those left out of a beneficiary designation form.
- When Rulings and Regulators Clash
- State courts may rule one way while the IRS rules another. In the end, the IRS is not governed by state court decisions. IRA assets are not subject to community property rules under the tax code.
- What Makes a Designated Beneficiary
- Andy Ives, another IRA Analyst with Slott & Co, explains that a beneficiary can be any person or entity, a designated beneficiary must be a living, breathing (natural) person.
- IRA Beneficiary Choices
- There are three categories of beneficiary choices for an IRA: spouses, charities, and non-spouses.
- Non-spouse Beneficiaries
- Only a natural person named on a beneficiary form is eligible to use the stretch IRA strategy, with one exception—if a “see-through” trust is named as beneficiary. However, using a trust as a beneficiary can be complicated and may involve more costs than it is worth.
See Christopher Robbins, Simple Estate Planning Choices can have a Big Impact, Financial Advisor, March 4, 2019.
Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.