Seven Devastating Mistakes To Avoid With Your IRA Beneficiary Form | Estate Plan Pros

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Your retirement account can pass on tremendous value to your beneficiaries – if you plan carefully and avoid these seven mistakes.

1. Outdated Choices

A very common mistake to make – your life has changed, but those changes aren’t reflected in critical financial decisions you made back when you set up your retirement account.  If you’ve remarried, your ex spouse is probably listed as the primary beneficiary.  If you don’t change the form when your life changes your IRA could easily go to your ex-spouse.  Your beneficiary form controls where the funds go, not your will, trust or any other estate planning document.

2. Naming Your Estate

Also known as “not filling out any beneficiary form,” this is possibly one of the most expensive mistakes you can make for your children.  If they inherit an retirement account, with the right planning, they can allow the account to grow over their lifetime – tax free.  But, if you name your estate, or neglect to fill out the form all together, they lose that option, costing them hundreds of thousands in lost growth potential, and significantly increasing their income tax exposure at the same time.

3. No Financial Controls

Your children as the new owners of their inherited retirement account will have easy access to that money.  Money that could have gone to pay college tuition or a down payment on a house, can just as easily be spent on a beach hut in Tahiti.  Using a Stand Alone Retirement Trust, you can add financial protection for your beneficiaries, so they can avoid having those retirement funds exposed to divorcing spouses, creditors, bankruptcy, and even their own poor money handling skills.

4. No Creditor Protection

You have differing degrees of creditor protection for your retirement account depending on the type of retirement account.  However, any inherited retirement account loses that protection (see US Supreme Court in Clark v. Rameker, June, 2014 ).  Naming an individual as a beneficiary leaves that individual completely exposed to creditors and bankruptcy.  But a Stand Alone Retirement Trust, using a method validated by the IRS in a private letter ruling, can be used to increase the level of protection for the inherited retirement funds.

5. Naming Your Living Trust as the Beneficiary

The IRS requires specific provisions to allow a stretch out – provisions that are typically incompatible with normal Living Trust provisions.  The risk is that your children would have to withdraw everything within five years, and not be able to stretch out the payments over his or her lifetime.  The end result of naming your Living Trust as the beneficiary could be the same as naming your estate as the beneficiary.

6. Forgetting To Name a Guardian

When you name a minor child as a beneficiary, the court will have to select a guardian, if you did not.  If you are divorced, its highly likely that your ex-spouse could be named as guardian.  Parents of younger children will want to carefully consider how they want the money controlled, and name a guardian and possibly a trustee.

7. MIA Form

In today’s world of company mergers, and acquisitions, there is no guarantee that all documents will be moved over correctly.  You should always keep a copy of your life insurance beneficiary form and retirement beneficiary forms with your other estate planning paperwork.  In case the company can’t find your paperwork, your heirs will know where to find a backup copy. You should review your beneficiary designations on a regular basis with your attorney or financial advisor to ensure that all is in order.

Originally published December 11, 2014.  Updated January 28, 2016.

"Investment" by jscreationzs

Tags:Asset Protection IRA

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Erik Hartstrom

Erik is the founder of Estate Plan Pros, a leading estate planning practice in Elk Grove.  Erik’s practice focuses on Estate Planning Law. In Estate Planning, Erik works with clients to make the process simple, so clients can focus on more important things. He is a local authority for specialized estate planning instruments, like Special Needs Trust, Irrevocable Trusts, or other focused documents. Erik has litigated, negotiated, and mediated the gamut of family law cases. With this unique perspective as a family law and estate attorney he can often spot issues otherwise overlooked. Prior to graduating he worked as a legislative analyst for a non-profit organization, and volunteered as a youth counselor. Erik currently participates in local politics and is an active member of his local church. Erik is very happily married and has two young sons. Together, his family loves to get outdoors and enjoy the varied activities the Sacramento region has to offer.


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