The One IRA Mistake That Could Cost Your Family Thousands - Rodgers & Associates
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The One IRA Mistake That Could Cost Your Family Thousands

IRA benefi­ciary desig­na­tions are one of the most misun­der­stood areas of estate transfers. What most people don’t know is that benefi­ciary desig­na­tions override your Last Will and Testament.

Yes, that’s right.

Regardless of what is written in your Will, your benefi­ciary desig­nation trumps your Will. Today, IRA assets can represent the lion’s share of an estate, so it is imper­ative that benefi­ciaries are named correctly.

Each financial insti­tution has a unique default benefi­ciary sequence. Let’s say you have three IRAs at three different financial insti­tu­tions, with no benefi­ciary desig­na­tions. In this scenario, the IRA proceeds could conceivably be distributed in three different ways. For example, TD Ameritrade’s default IRA benefi­ciary is your spouse, then your children (including adopted children), in equal shares, then your parents in equal shares, then the legal repre­sen­tative of the estate. Fidelity’s IRA benefi­ciary defaults are to the surviving spouse and then to the estate. The default benefi­ciary sequence is listed in the IRA custodial agreement received at the time of opening the account.

Consider the court case of Smith v Marez from 2008. Leonard Smith died February 29, 2008. The North Carolina Court of Appeals case to decide who would receive the funds was decided on December 6, 2011. The time frame is worth mentioning because it took nearly 4 years to resolve this benefi­ciary issue.

What brought on this case?

Mr. Smith’s IRA benefi­ciary desig­nation listed, “to be distributed pursuant to my last will and testament.” Because his specific children and their respective percentages were not correctly named, the benefi­ciary form was deemed invalid. By default, the funds were distributed by Pershing, the fund’s custodian, in full to Mr. Smith’s current wife of 2 months. The value of IRA was $400,000! This is a huge uninten­tional mistake that can devastate families in an already emotionally charged time.

The best way to protect yourself from mistakes is to make sure you have copies of your benefi­ciary desig­na­tions, along with the IRA custodial agreement, for each IRA in your name.