Wednesday, March 13, 2013



Six Biggest IRA Beneficiary Form Mistakes

Americans hold nearly $15 Trillion in IRA’s and other qualified plans. If you have a retirement plan you have made a series of very wise deci­sions. Now you must take steps to protect and preserve what you have worked so hard for.

Do you want your heirs to have to chase after the IRA money? Better make sure you have an up to date beneficia­ry form. On January 26, 2009, the United States Supreme Court unanimously ruled in the case of Kennedy vs DuPont that the plan administrator was not required to honor the divorce decree. William and Liz Kennedy were married in 1971 while William was an employee of DuPont and a participant in its Savings and Investment Plan. William designated Liz as the sole beneficiary of his plan benefits. When William and Liz divorced in 1994, the divorce decree terminated any of her rights to William’s pension or retirement benefits. William never changed his beneficiary form. When William died in 2001, his estate demanded the plan funds based on the domestic relations order. The Du­Pont plan administrator refused and disbursed the funds to Liz, in reliance on William’s beneficiary designation form. The ex-wife, who was still listed on the beneficiary form, gets the money, even though the divorce court ordered her rights terminated and she signed a waiver.

It is important to understand that your will does not control who gets your IRA.

The Beneficiary Designation Form trumps your will. Filling out the Beneficiary designation form correctly is critical. In my practice I see clients who come in with sophisticated wills or trusts. When I ask about the IRA it is often the largest asset. When I ask what the Beneficiary Designation form says they look surprised. They have no idea what the form says. Many cannot even find the form or remember when they last reviewed it.

So what are the Biggest mistakes?

Mistake #1. You cannot find the form. The Supreme Court made it clear, the beneficiary form rules. Without the form you are stuck with the default provisions of the plan. You may not like the result. Frequently it goes to your es­tate. This is the last place you want it to go. Make sure you and your family can find the form. Do not assume that the plan administrator will be able to find it either. In this time of companies merging, going out of business, getting sold, or moving, files get lost or misplaced. Do you think that when all those files are getting moved that someone takes the time to say wait a minute these Beneficiary forms are very important! Not likely. Solution Get an acknowledged copy of your beneficiary form from the IRA administrator. Make sure that you keep the forms in a place that you and family can easily find. All of your planning goes out the window if the form cannot be found.

Mistake #2. The form is out of date. Have there been any changes in your life, such as marriage, birth of a child or grandchild, divorce, job change, retirement, a death? Remember that your will cannot change the beneficiary of your plan! It is imperative that you review the beneficiary form regularly. This is basic, but unfortunately many get it wrong. In 2001 The New York Post ran a headline declar­ing a “Pension Pickle!” after Anne Friedman’s $900,000 pension went not to her loving husband of nearly 20 years but to her sister, who refused to share her new found wealth. The beneficiary form Anne filled out in 1974 and never updated after she married was binding.

Another problem I have seen far too often is accidentally disinheriting a child’s family. You name your three chil­dren as beneficiaries, intending each child to receive 1/3rd. Your oldest child predeceases you. At the time of your death your two surviving children receive 50% each instead of the 1/3rd you intended. Your oldest child’s family gets nothing.

Solution. Review the form annually. Tax time is an ideal time since you are reviewing all of your financial records anyway.
Mistake #3. You have not named a backup benefi­ciary. If you do not name a backup beneficiary then who knows who gets the money. The Probate Court will most likely be in charge. Example: you name your spouse as the only beneficiary. If your spouse dies before you, there is no beneficiary so your IRA will be liquidated, taxed and what is left will be distributed to your estate. It is a good idea to name someone, say your children, as contingent beneficia­ries. If you name backup beneficiaries then the IRA has a chance of getting it where you want it to go.

A single person may name his parents first and then St Nor­bert College as the backup beneficiary. Naming a charity is a great planning idea but that is a topic for another day.

Mistake #4. Naming a minor as a beneficiary. A minor cannot control funds. Court appointed Guardians are in control. This will result in a trip to the Probate Court, and later, when the child turns 21 (18 in some states), to the Sports Car Dealership. The only question will be what color! Solution Set up a Trust so the funds are managed under your instructions, by people of your choice.

Mistake #5. Missing out on the Stretch IRA Op­portunity. The Stretch IRA can turn a modest IRA into millions for your beneficiary. The Stretch IRA is not some­thing that you can buy. Rather it is how you set up your beneficiary designation. Stretching the IRA payments over the lifetime of the beneficiary allows the IRA to grow tax deferred. Let’s do some calculations. We have a $100,000 IRA go to a 30 year old child. If the funds earn an aver­age of 7% over the life of the child which according to IRS tables is 53 years, the value would be $1,026,533. A $100,000 IRA has become a very significant asset. Naming an even younger grandchild can supercharge the result to over $2,000,000.

This is great but will it really happen? Probably not! Why? IRS statistics show us that 90% of IRA’s are cashed out within 6 months of death. This is called the “Found Mon­ey” syndrome. This new wealth is unexpected gain to be spent.

Solution Something needs to be put in place to make sure that the funds will be used over a lifetime. This is a trust. It has lots of different names. IRA Stretch Trust, Retire­ment Benefits Trust, Stand Alone IRA Trust just to name a few. Regardless of the name the purpose is to preserve the Stretch Opportunity.

Mistake #6. Not providing Creditor Protection for the Beneficiary. Would you like to protect your child’s inheritance from divorce, lawsuits, creditors, business failure, even bankruptcy grabbing the IRA? Some children suffer from poor money management skills and others have special needs. The divorce rate in this country is quite high. If your IRA is left to your child who later gets di­vorced who will end up with the funds? Would you like to protect assets and keep them in the family? Are you aware that you can do this? Solution In my office we build Castle Trusts. Historically why were Castle’s built? Protec­tion. We like to make sure that your loved ones have the Castle Trust protection. These are trusts that have special asset protection features built in to them that help preserve your wealth and safeguard your assets.

The Bottom Line

The difference between effective planning and getting it wrong can cost your family millions of dollars. Done cor­rectly your retirement plan can preserve some significant funds for future generations to enjoy. Wouldn’t it be great if everything always worked out the way you planned? In a perfect world it does. But I am sure you are aware ours is a world full of surprises where Murphy’s Rule often jumps up to bite you. The rules surrounding retirement plans are complicated enough, don’t compound the difficulty by messing up the beneficiary forms. When a good portion of your assets consist of a retirement plan you need expert help.

Important: The information in this article is for general in­formation purposes only and is not, nor is it intended to be, legal advice, including legal advice for Internal Revenue Code purposes as described in IRS Circular 230. Tax law changes frequently, so please consult your financial advisor.
This article was orignally posted in you can view it here

How to Leave Assets to Adult Children

How to Leave Assets to Adult Children When considering how to leave assets to your adult children, first decide how much you want each one to receive. Most parents want to treat their children fairly, but this doesn’t necessarily mean they should receive equal shares of your estate. For example, you may want to give more to a child who is a teacher than to one who has a successful business. Or you may want to compensate a child who has taken care of you during an illness or your later years.

Some parents worry about leaving too much money to their children. They want their children to have enough to do whatever they wish, but not so much that they will be lazy and unproductive. Well, no one said you have to give everything to your children. You may prefer to leave more to your grandchildren and future generations through a trust, and/or make a generous charitable contribution.

Next, decide how you want your children to receive their inheritances. You have several options from which to choose.

Option 1: Give Some Now
If you can afford to give your children or grandchildren some of their inheritance now, you will experience the joy of seeing the results. You could help a child buy a house, start a business, be a stay-at-home parent to your grandchildren, or even see your grandchildren go to college—and know that it may not have happened without your help. This would also let you see how each child might handle a larger inheritance.

Option 2: Lump Sum
If your children are responsible adults, this may seem like a good choice—especially if they are older and you are concerned that they may not have many years left to enjoy the inheritance. However, once a beneficiary has possession of the assets, he or she could lose them to creditors, a lawsuit, or a divorce settlement. Even a current spouse can have access to assets that are placed in a joint account or if your child adds his/her spouse as a co-owner. If it bothers you that a son-or daughter-in law could end up with your assets, or that a creditor could seize them, or that a child might spend irresponsibly, a lump sum distribution may not be the right choice.

Option 3: Installments
Many parents like to give their children more than one opportunity to invest or use the inheritance wisely, which doesn’t always happen the first time around. Installments can be made at certain intervals (say, one-third upon your death, one-third five years later, and the final third five years after that) or at certain ages (say, age 25, age 30 and age 35). In either case, be sure to review your instructions from time to time and make changes as needed. For example, if you live a very long time, your children might not live long enough to receive the full inheritance—or, they may have passed the distribution ages and, by default, receive the entire inheritance in a lump sum.

Option 4: Keep Assets in a Trust
You can keep your assets in a trust and provide for your children, but not actually give the assets to them. Assets that remain in a trust are protected from a beneficiary’s creditors, lawsuits, irresponsible spending, and ex- and current spouses. If you have a special needs dependent, or if a child should become incapacitated, the trust can provide for this child without jeopardizing valuable government benefits. If you have a child who might need some incentive to earn a living, you can match the income he/she earns. (Be sure to allow for the possibility that this child might become unable to work or retires.) If you have a child who is financially secure, you can keep the assets in trust for your grandchildren and future generations, and still provide a safety net if this child’s situation changes and he/she needs financial help. This option gives you the most flexibility, control and protection over the assets you worked a lifetime to accumulate and build.

While there is no one right choice for how to leave assets to all adult children, given many individuals’ concerns over protecting inheritances from creditors (particularly ex son or daughters in law), many choose leaving their assets in trust for the benefit of their children and/or grandchildren. Regardless of your ultimate choice, this is an important decision that should be considered with input from your estate planning professional.