IRA Beneficiary Designation Mistakes

August 17, 2013

IRA Beneficiary Designation Mistakes

Americans held over $18 Trillion in IRA and other retirement assets. Retirement assets are protected from judgment execution in most states and grow tax deferred or tax free.  Putting money in has been a very wise decision. You still need to address your beneficiary designation issues to keep from losing all that value.

In Alaska, normally the beneficiary designation controls who gets the account.  Do you know what was written on your beneficiary designation? 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 beneficiary designation controlled over a subsequent 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. But, 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 based on the beneficiary designation form. Liz, the ex-wife, was still listed on the beneficiary form, got the money despite the divorce decree and her prior waiver of ownership.  She didn’t own the money; but, he was still entitled to give it to anyone he chose.

Your will does not control who gets your IRA.  But, heirs may continually find arguments about the issue.

The Beneficiary Designation trumps the will. Filling out the Beneficiary designation form correctly is critical. You may have sophisticated wills and trusts; but, still not get what you want.  If the IRA is your largest asset the time should have been spent considering it instead.


Problem #1. You can’t find the form.

The Supreme Court is clear, the beneficiary form controls.  Many financial institutions don’t retain records past seven years.  With all the merging, bankruptcies and reorganizations of financial institutions you run a big risk that they don’t have your designation. Without the form you are stuck with your financial institutions default provisions.   If it goes to your estate, that may help.  But, you then lose out on tax deferral benefits that we discussed before.

Solution. Either get a copy of your designation form or make a new one.  Keep a copy of the designation with your will and proof that you delivered the designation form.

Problem #2. The beneficiary designation is old.

Life changes, such as marriages, births, divorces, job changes, retirements and deaths are reasons to check the designations.   In 2001 Anne Friedman’s $900,000 pension went to her sister and left her husband nothing.  Despite 20 years of marriage bliss, Anne died with the 1974 beneficiary designation as the controlling document.   Anne filled out the form before their marriage.

You can also disinherit your own child’s family. If you have three children and name each as an equal recipient; but, one predeceased you, the other two take everything.  The siblings can leave your grandchildren penniless.

Solution. Review your beneficiary designation forms annually.

Problem #3. No backup beneficiary Designation.

When the only named beneficiary dies before you do, then it all goes to the estate.  Taxes take a huge bite out of the account if it passes through probate.   When you name backup beneficiaries, your IRA has a chance of getting it where you want it to go.

Problem #4. Naming a minor in the Beneficiary Designation. 

Retirement accounts pass outside of probate.  But, if you give the assets to a minor the financial institution may require to your executor to establish a guardianship to control the funds.  The guardianship lasts only until the minor reaches 21 and then they spend all the money.

Solution. Establish a Trust to manage potential minors funds.

Problem #5. Failing to maximize IRA tax Deferment. 

Maximizing tax deferment allows modest IRA to grow huge over time.  With the proper beneficiary designation you can leave the assets growing a long time.  We’ve discussed these strategies before, here.

Problem # 6.  Failing to Control the Beneficiaries.

IRS statistics show beneficiaries cash out 90% of IRA’s within 6 months of death. Beneficiaries tend to immediately put to use all new-found wealth.

Solution.  Implement a trust as the beneficiary to control the investment process, elections and distribution decisions.

Problem #7. 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.  Use a trust designed for IRA custody and control as the designee.

If you have significant savings in your retirement accounts and want to maximize your family’s financial security, give us a call at 907-375-9226.