When clients begin the process of estate planning, individual retirement accounts are a popular choice. But while IRAs can be a fairly straightforward way to distribute your assets, there are ways that clients can unnecessarily complicate the process for their heirs. Below are some common mistakes.
-- Failing to update beneficiaries after major life changes. If you go through a divorce, remarry or your designated beneficiary dies, you need to make the necessary changes to your IRA's beneficiary form to reflect the most recent changes. This is vital even for clients who have updated their wills because IRA beneficiary forms override wills.
-- Listing your estate as beneficiary. This can be an inadvertent blunder made by failing to name a designated beneficiary, which by default falls then to the estate. As such, it is subject to probate and any claims from creditors. Additionally, if clients name someone other than their spouse as beneficiary, that person has the option to defer taxes by extending the mandatory minimum distributions out over a significant period of time.
-- Not placing financial controls on the money. This is important when clients want to provide for an heir who has demonstrated fiscal irresponsibility or financial naivete in the past. By putting assets into a trust, clients ensure that their heir(s) can't blow it indiscriminately. They can stipulate the proceeds may be used only for specific purposes, such as maintenance, health or education.
Trusts are complex, however. To achieve the desired results, clients should involve their estate administration attorney to draw up and manage the trust to sidestep any legal challenges.
Source: Bankrate.com, "5 IRA beneficiary form mistakes to avoid," Shelly K. Schwartz, accessed July 21, 2016