IRA Critical Mistake #8

You’ve been very careful with your IRA. You thought you did everything right. But ask yourself this:

When you named the people who will receive your IRA when you die, did you use the exact beneficiary designation language provided to you by the attorney who created your Will?

If your answer is no, or if you aren’t sure, there’s a strong chance you’re making IRA Critical Mistake #8 in THE IRA CRITICAL MISTAKES series.

How so? Read on!

So, you finally did your “duty” and got a Will. Well, done.

That means your “estate plan” is complete, right?

Not so fast.

Making sure that your money and property go to your intended heirs goes far beyond merely creating a Will. This is certainly true when it comes to estate planning for your IRA, which, for many, is one of your biggest assets.

Are you surprised to know that, when you die, generally speaking, your IRA does not pass according to the terms of your Will? If your Will doesn’t control where your IRA goes after you die, then what does?

Your IRA goes to whomever you designated as beneficiary with your IRA provider. You first designated beneficiaries when you started your IRA. Perhaps you’ve changed your IRA beneficiaries since then.

In view of this, if you don’t use the IRA beneficiary designation language provided by the attorney who created your Will, and instead craft the beneficiary designation yourself, it’s quite possible that, after you die, your IRA will pass in a manner that conflicts with, or even contradicts, the estate plan you created with your attorney. In other words, in the event of your death, your IRA might not go where you intended it to go.

IRA Critical Mistake #8 is failing to use the exact IRA beneficiary designation language provided to you by the attorney who created your Will.

Sadly, “unintended consequences”—otherwise known as “Critical Mistakes”, are often the result of failing to use the exact language provided to you by your attorney to designate the beneficiaries of your IRA.  To help avoid five of the most severe unintended consequences, consider these questions:

1. Have you divorced since the last time you updated the beneficiary designations of your IRA?  If you have, is your ex-spouse still designated as a beneficiary?  If you’re married now to Spouse #2 it’s possible you don’t want to still name Spouse #1 as a beneficiary.
   
   
2. The last time you updated your Will, did you also update your IRA beneficiary designations?  If you updated your Will, it’s possible you’ll need to update the beneficiary designation of your IRA as well to reflect the update to your Will and overall estate plan.
   
   
3. Did you name “your estate” or “according to my Will” as a beneficiary of your IRA?  If so, naming your estate or Will can result in higher income taxation to your IRA beneficiaries
   
   
4. Do you have a “bypass trust provision” built into your Will?  IRA owners commonly limit their beneficiary designations to their spouse and children.  This beneficiary designation language might be appropriate if your estate is small but might be a mistake if your estate is large. Large estates can trigger large state and federal estate taxes upon death.  Because of this, attorneys for large estates often insert a “bypass trust provision” in the Will to reduce the eventual estate tax. If you have a bypass trust provision in your Will, it’s possible that language related to the bypass trust provision should be included in your IRA beneficiary designation.
   
   
5. Did you name a minor, such as a child, as beneficiary of your IRA?  If so, there are at least two potential problems.  One, IRA funds might not be accessible to minors upon your death.  Two, considerable funds left to minor children sometimes trigger custody battles if your estate plan is not clear about who their guardians will be upon your death.

• Periodically review the IRA beneficiary designation language provided by your estate planning attorney with your financial or tax advisor.

• Periodically confirm the beneficiary designation language on file with your IRA provider matches the IRA beneficiary designation language provided to you by your estate planning attorney.