Common IRA Mistakes to Avoid
From the Orange Couch

Ashley:
Hello and welcome back to the Orange Couch, where Robin and I are going to tackle today a subject that could really impact your financial legacy, and that’s IRA beneficiaries. Robin and I just read Laura Saunders’ Wall Street Journal article over the weekend, and man, was that eye-opening. It’s something that we deal with every day, but I don’t think others realize how important it is.

Robin:
Every time we have a client meeting, beneficiary designations are one of the things we audit. We just want to make sure that the names are spelled correctly, the percentages are correct, and that there’s also a contingent beneficiary. That’s really important. They name primary, but I have seen it where there’s no contingent beneficiary.

Robin:
One of those ways is because of divorce. A person hasn’t changed the beneficiary and they still have the ex-spouse. When they pass, it goes to that ex-spouse. Another common one is where an adult child can’t really handle that much money being received at one time. I often will tell the parents, why don’t you just give it to them now? They say, they wouldn’t know how to handle it. Well, you’re going to give it to them when you’re not around to help them along the way? So that might be a reason for setting up the beneficiary as a trust rather than directly to that adult child if they don’t really know how to handle that kind of money.

Robin:
That is true and you think of a minor as somebody under 21. You can leave an IRA beneficiary to a minor. But most likely, a court will have to step in and name a custodian or guardian for the money and for the person in that case. But it can be done. A better way might be just to simply name it to a testamentary trust for the benefit of that child.

Robin:
Yeah, that’s really important today. You think of an IRA, your primary beneficiary would be your spouse. The reason for that is that when they receive it, they can roll it into their own IRA and simply take it out over their lifetime. On the other hand, if it’s a non-spouse like a child, I mean, in my case, when my mother passed, my dad had already pre-deceased. She left it to my sister and I and we can stretch it out over our lifetimes. But in 2019, the SECURE Act was passed and said, you have to take it out over 10 years now, which really jacks up that tax liability. And so you really need to see an advisor to talk about tax planning in that case.

Robin:
I think the biggest myth is that if they don’t plan properly, if they don’t update their beneficiary, that their last will and testament will take care of it. That’s just not the case. So think about property. It passes three ways. The first way would be a contract. An example of a contract would be life insurance. Whoever the primary beneficiary of your life insurance is, that’s who it goes to. Another example would be joint with the right of survivorship. So if you and your husband own your house jointly, whoever lives along it longest, it automatically goes to them by law. If either one of those don’t apply, then it goes last will and testament. The thing that I always want to encourage people is that what is the largest asset that people have today? It’s generally their 401k. It’s their IRA. And yet they don’t necessarily fill out the beneficiaries to update and make sure they say what you want them to say.

Ashley:
Sometimes it’s even worth looking at your parents’ IRA forms.

Robin:
That is true. You think your parents may have not touched their beneficiary forms in years. There may be a child that’s pre-deceased, an adult child that’s pre-deceased, and I think that’s something to look at.

Robin:
We use the term per stirpes a lot. What it means is let’s just say that you had three adult kids as your beneficiary and one of those adult kids had pre-deceased the parent. Per stirpes says it will go to that adult kid’s heirs or children. If you don’t want that to happen, if you want to go to the other two children, you need to fill out the documents. You need to come see Ashley and make that change. That’s something that we do all the time.

Ashley:
Robin, I really appreciate you bringing this to our attention because it really has a huge impact, and that’s something that people should be looking at. So, give us a call. We’re happy to walk you through it and answer any questions you might have about this and general estate planning. Thank you.

Robin:
Thank you.