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IRA Beneficiary Form Mistakes to Avoid

If you have an IRA, you may want a loved one to take over your account in the event that something happens to you. You will need to confirm that your beneficiary form is up to date. Failing to update this document can lead to financial troubles for your heir even to the extent of him or her being denied their inheritance.

tag_outdated_formBankrate shares some common beneficiary form mistakes and how to avoid them:

“Outdated forms

“It would be a terribly romantic story if it wasn’t a terrible mistake. Years or even decades after a divorce, your ex-spouse could still inherit a portion of your estate if you didn’t update the beneficiary form on your IRA.

“And forgetting to update estate planning information following a divorce, death of the beneficiary or remarriage is one of the most common blunders when it comes to beneficiary forms.

“Your beneficiary form should be reviewed and updated after every life event, says Neil Brown, CFP professional and CPA with Burkett Financial Services in West Columbia, South Carolina. Updating your will is not enough.

“‘The IRA beneficiary form overrides your will,’ says Brown.

“Indeed, if you get remarried and change your will, but forget to amend your IRA, the person named on your IRA beneficiary form (most likely your ex) would be legally entitled to your assets when you die — and, thus, able to pass that money along to any children he or she had from other marriages.

“Naming your estate

“This is the biggest blunder of all.

“Those who name their estate as their IRA beneficiary, or who inadvertently do so by failing to select a beneficiary, deprive their heirs of a significant growth opportunity.

“Normally, nonspouse beneficiaries who inherit a traditional IRA can choose between two options: Either liquidate and pay taxes on those assets within five years of the owner’s death, or ‘stretch’ their required minimum distributions out over their lifetime.

“‘Too many people do not understand the significance of a beneficiary form and leave them blank or name their estate,’ says Brown. ‘This is a complete mistake because it limits the beneficiaries’ ability to stretch the IRA after the owner’s death. It speeds up the income taxes on the distributions as well and can amount to hundreds of thousands of lost growth potential.’

“Another negative to not naming an IRA beneficiary: The probate court would consider that asset to be part of your estate after you die, and thus it would be subject to any creditors.

“If that’s not enough, your IRA would also not be distributable to your heirs until the probate process concludes, which can take more than a year.

“Do your family a favor and be sure you’ve named an actual person as your beneficiary, not your estate.

“No financial controls

“Another IRA no-no is naming your child as sole beneficiary without establishing controls, especially if he or she lacks financial sophistication.

“After you die, the money in your account belongs to your beneficiary. Your beneficiary can spend it however he or she likes — on a college education, a down payment on a house or at a tattoo parlor in Tennessee.

“So much for tax-deferred growth.

“If a loss of control concerns you, you might consider naming a trust as beneficiary instead, says Brown.

“A trust enables you to stipulate how much your beneficiaries will receive and how often.”