Do your heirs a big favor: Choose IRA (and other) beneficiaries

Category: Estate Planning

While I have blogged on this idea before (Retirement Accounts and Beneficiary Designations - Myths and Misconceptions ), the intro to this article Do your heirs a big favor: Choose IRA beneficiaries reminds me of what we commonly see at the death of the second spouse - the Will had provided for contingencies, so no new estate planning was done. Unfortunately, the second spouse had no idea who was named as a contingent beneficiary on insurance, retirement plans, etc., and sometimes those dollars go to unintended beneficiaries (whether they be children or Uncle Sam).


"After the recent death of his mother, James B. from Santa Barbara had a sit-down talk with his father, covering family finances.
'My father doesn't need to change anything, he's set up for life,' James said in an e-mail, 'but not changing anything means he wants to leave everything exactly as he had it with Mom. He says that his will sorts everything out, but I'm afraid we're missing something here.'
What James' father is missing is a named beneficiary on his individual retirement account; his wife was the beneficiary, but her death and the absence of a contingent beneficiary means the money will go the estate. The will eventually will sort things out, but the error will turn a lifetime of savvy investing into a Stupid Investment of the Week."

Why is not looking at your IRA beneficiaries not wise? Because often the default beneficiary is the estate. From and IRA perspective, and estate is not a favored beneficiary. Human beings as beneficiaries have the right to stretch-out their inherited IRA's over a period of time - thus deferring any income tax on the dollars in the IRA. Estates as beneficiaries must have the entire IRA distributed within 5 years, thus triggering payment of all the income tax on the dollars.
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