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And the IRA goes to…

March 4, 2014

We have all heard the horror stories about the wealthy actor or business man or woman who dies suddenly, inexplicably leaving all their retirement account assets to an ex-spouse or former partner because they failed to update their beneficiaries. The reality is that this mistake is quite common and though it might not make headlines every day, it is a simple, avoidable mistake made by even some of the most financially savvy amongst us and for reasons that may surprise some people.

It is a commonly held belief in the state of California and in many other states in the nation that a simple Will or Trust document should provide all the directives necessary to successfully implement a decedent’s wishes in the processing of their estate. However, there remain many instances where the instructions provided by such documents are either incomplete or unclear. One major caveat is that the language in a Will or Trust directive has to be acceptable to the custodian of any IRA account. Since IRA’s are not considered to be a part of a decedent’s estate, estate plans, pour-over wills, trust directives, and simple wills are not technically binding on an IRA’s custodian. So, while many individuals use these documents as their “safety net” to include assets that might not be funded into their trusts or other organizations, it is still quite likely that the retirement account will follow the directed beneficiary on file no matter how inconsistent or out-of-date it may be.

The importance of designating a direct beneficiary in any IRA-type account cannot be overstated. As an asset subject only to the provisions of the custodian when it comes to distribution upon death there are countless numbers of ways for the account to go in unwanted directions. A common practice for more than 30 years has been utilizing language for designating beneficiaries that may be unknown at the time of designation. For instance, should a woman wish to leave her retirement account to her surviving children without naming them all directly she could indicate two types of directives: per stirpes or per capita. For those of us rusty on our latin, the per stirpes designation segregates assets to heirs by surviving branches of the family (i.e. three immediate surviving children would each receive 1/3 of the assets, for any predeceasing their mother, that 1/3 share would be divided equally among the next generation of the deceased child and so on). For per capita designations the shares would be divided equally between generations (i.e. first generation survivors would split equal parts, second generation survivors would split any remaining parts equally). So, while these methods are common among well informed retirement account holders, still the tendency to name specific individuals at static points in one’s lifetime still plagues the majority of account holders.

While it is futile to speculate on why some individuals simply delay the auditing of beneficiaries on their retirement accounts, it is important to acknowledge that retirement accounts that reach a certain size have done so either through inherited means or significant incomes; in either case it gives the indication that the individuals responsible for managing such austere items of a retirement account are typically quite busy in nature and as such these particular details often go unnoticed and over-looked indefinitely. However, we can simply look at the history of middle to high net worth individuals to see how often this tiny detail can impose major expenses in the form of legal fees and infighting.

So, why is this important?

Our clients, in most cases, have spent a lifetime accumulating significant wealth and the advisors whom assist them often rely on us to look around corners and provide insights. So, while we, as professionals, could expect that the financial advisor, planner, attorney, or other professional assisting our client should be making similar statements and observations as we do, it is a topic of enough importance to echo as we try to provide the best guidance and advice to those whom entrust us with their information. Never assuming that someone else has provided this simple reminder since it is likely something that will need change more than once. A beneficiary audit is neither complex nor time-consuming and, in most cases it is a simple form or phone call, but can save clients incredible amounts of money at a very critical time in their estates transition.

The information provided is not written or intended as specific tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalties. MFG, its employees and representatives, are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

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