“One of the easiest and most helpful estate planning tools to use is also the easiest to mess up,” cautions bankrate.com, referring to the naming of IRA beneficiaries.
At Geyer law, we agree. Often, we’ve found, the problem arises out of a simple failure to update the IRA beneficiary designation form after a life change. Amidst all the stress of a divorce, a death in the family, or even the “positive stress” of a remarriage, IRA owners can simply forget to make the necessary adjustments to their paperwork. Even folks who go through the process of regularly updating their wills sometimes forget – the IRA beneficiary form overrides the directives in the will!
It seems so simple to just name your estate as the beneficiary of your IRA. That way, you assume, all your assets will go through one “funnel” and get divided as you’ve specified in your will. In fact, this is probably the most common flaw we uncover when reviewing estate planning clients’ plans.
Often, that very flaw comes about by default. If you’ve named no beneficiary at all for your IRA, all the assets in the account are automatically considered to be part of your estate. That may create long delays just when funds are needed by heirs, and even worse, make the assets subject to creditors’ claims.
As estate planning attorneys, when we encounter no-named-beneficiary situations, our first thought is “Oh, no! This person probably worked half a lifetime accumulating assets in a tax-deferred manner, and now they might lose one very amazing feature of IRAs, which is that those tax advantages don’t need to end when they die.” That’s because even non-spouse IRA beneficiaries can choose to pay the tax bill over a five year period, or even better, “stretch” the distributions over their own lifetimes. But…if the estate is the named beneficiary, all those planning options are gone! (We want to remind our blog readers that the rules are different for Roth IRAs.)
Beneficiary designations are all about you and the things you want to accomplish in your planning. It may be that naming a trust or a charity would best accomplish your goals. Each situation is different, but for us at Rebecca W. Geyer & Associates, the “takeaways” are these:
a) Your estate might be your worst IRA beneficiary choice.
b) Selecting the proper IRA beneficiary designations may not be a do-it-yourself affair!
– by Ronnie of the Rebecca W. Geyer & Associates blog team
