One of the biggest mistakes retirement plan owners too often make is failing to review and update their beneficiary designations at least every two years. How you complete the beneficiary form(s) for your IRA, annuity or qualified plan will determine who gets to inherit them as well as the tax consequences for the money they inherit, regardless of what's in your will, trusts or other legal documents.
Over the years, I've heard numerous horror stories about IRAs and qualified plans that ended up in the hands of people who were not the intended beneficiaries.
In one example, the United States Supreme Court ruled that an IRA owner's daughter could not inherit her father's $402,000 company retirement plan because he neglected to change the named beneficiary from his ex-spouse to his daughter after he got divorced. Even through the ex-spouse waived her rights to the money in the couple's divorce decree, the beneficiary form takes precedence over divorce decrees, wills and trusts. The person(s) you name on your beneficiary form are the ones who will inherit your IRA, regardless of any other legal documents.
In another example, an elderly widower was left penniless when it was discovered that his wife had named her mother, uncle and sister as beneficiaries of her million-dollar retirement plan prior to their marriage and never updated the beneficiary form. Because the wife's mother and uncle were also deceased, the entire proceeds from the retirement plan went to the deceased woman's sister who refused to share anything with her sister's widower. The Manhattan Supreme Court ruled that ERISA plans, governmental plans and non-qualified plans do not provide spousal protection, hence the widower's sister-in-law was entitled to all of the proceeds from her sister's IRA.
Currently, I'm helping someone rectify the mess created when his father (who intended to leave his IRA to his three children) mistakenly left it to a trust earmarked for his second wife's children, essentially disinheriting the IRA owner's three children. At this point in time, it's not clear whether the IRA owner received bad advice from his estate planning attorney or financial advisor, or whether both professionals failed to notice their client's critical mistake. Regardless of who's to blame, the damage is done. At best, my client and his siblings will be able to inherit what's left of their father's IRA after having to liquidate it and pay over $200,000 in taxes. In the worst-case scenario, the money in their father's IRA will go to his second wife's children. It's sad to think that what happened to my client and his siblings could easily have been avoided, had their father's estate planning attorney, CPA or financial advisor reviewed his IRA beneficiary form and noticed the critical mistake.
Sometimes, I'm able to come up with creative solutions to help people rectify IRA and plan-related mistakes and oversights. However, most are irreversible. The best way to avoid them is to work with a financial advisor who knows the complex tax laws surrounding IRAs and qualified plans and knows what to look for to help you avoid critical, costly mistakes and oversights. Most people assume that their CPA, estate planning attorney and financial advisor know everything they need to know about IRAs, qualified plans and how to incorporate them in their client's estate plans. Unfortunately, that's often not the case, and an expensive assumption.
In my client's case, neither his father's estate planning attorney nor financial advisor knew enough about IRAs to avoid the problem my client and his siblings are now facing. Too often, estate planning attorneys advise their clients to name the client's living trust as a primary or contingent IRA beneficiary. In most cases, unless there are specific control issues, they would be better off naming their children individually on the beneficiary form. My parents' estate planning attorney is considered to be one of the best in Palm Beach, Florida, yet he, too, advised my mother to name her trust as her IRA beneficiary. As I often do, I advised her to correct her beneficiary form and name my brothers and me individually.
So what can you learn from these people's mistakes and oversights?
- Update your beneficiary form(s) every one to two years.
- Remember that IRAs, annuities and qualified plans are transferred at death by the beneficiary form, which takes precedence over wills, trusts and other legal documents.
- IRA and plan-related mistakes are often irreversible.
- The best way to avoid potentially costly IRA and plan-related mistakes and oversights is to work with a financial advisor who specializes in IRAs and retirement distribution planning. While most financial advisors know the basics about IRAs, few know the complex tax-laws surroundings IRAs and qualified plans or are qualified to help you:
- Maximize your retirement savings
- Minimize taxes
- Ensure that your retirement savings is passed to your intended beneficiaries in the most tax-efficient manner and accordance with your goals and values
If you have questions, please feel free to call me at (818) 673-1695 or email me.
Best regards,
Rich Winer
President, Winer Wealth Management, Inc.
To learn more about Winer Wealth Management, please visit our website at www.winerwealth.com.
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Rich Winer is an IRA and retirement distribution planning specialist, also the president and CEO of Winer Wealth Management, Inc. in Woodland Hills, CA. His services include asset management, insurance, retirement and estate planning for individuals and families in Los Angeles and throughout the United States. Additional services include insurance, employee benefit and retirement plans for businesses.
Winer Wealth Management's serves clients throughout the country, especially in California including Woodland Hills, Los Angeles, Calabasas, Tarzana, Encino, Sherman Oaks, Burbank, Northridge, North Hollywood, Agoura Hills, Westlake, Thousand Oaks, West Hills, Beverly Hills Brentwood and Santa Monica.
