If you have a retirement plan, you have made a series of very wise decisions. Now you must do what is necessary to protect and preserve what you have worked so hard for. The most important thing to remember is that your will does not control who gets your IRA. The beneficiary designation form trumps your will. So filling out the form correctly is critical. So what are the biggest mistakes?
You cannot find the form. Without the form you are stuck with the default provisions of the retirement plan, and you may not like those provisions. Frequently the proceeds then go to your estate. Make sure you and your family can find the form. Do not assume that the plan administrator will be able to find it. Get an acknowledged copy of your beneficiary form from the IRA administrator.
The form is out of date. Have there been any changes in your life, such as marriage, birth of a grandchild, divorce, retirement or a death? Remember that your will cannot change the beneficiary of your plan. If the beneficiary designation is outdated, that will still be where the proceeds will go upon your death. What about accidentally disinheriting a child’s family? One of the children you’ve named as a beneficiary predeceases you. Your surviving children will receive the benefits, not including the children of your predeceased child. Review the form annually, perhaps at tax time.
You have not named a backup beneficiary. If you have not named a backup beneficiary, it may unclear who gets the money. The proceeds may be payable to your estate, which will not have the ideal tax consequences. It is a good idea to name someone as a contingent beneficiary.
Naming a minor as a beneficiary. A minor cannot own or control funds. A guardian will need to be appointed by the Court, and when the minor then reaches the age of 18 he or she can do whatever they wish with those funds. The best solution is to set up a trust so the funds can be managed under your instructions, by a trustee of your choice.
Missing out on the Stretch IRA Opportunity. The Stretch IRA is not a particular kind of IRA, but rather how you set up your beneficiary designation. Stretching the IRA payments over the lifetime of the beneficiary allows the IRA to grow tax deferred. A big problem with naming children or grandchildren directly as beneficiaries is that the stretch does not happen. They take the funds as soon as they can get them. Once again a good solution is to name a trust as the beneficiary, to preserve this stretch opportunity.
Not providing Creditor Protection for the beneficiary. Would you like to protect your child’s or grandchild’s inheritance form divorce, lawsuits, creditors, bankruptcy? If your IRA is left directly to a child who later gets divorced, who will end up with the funds? Would you like to protect assets and keep them in the family? How do you do that? Once again, the best solution is to set up a trust, with special asset protection features, to be the beneficiary of the IRA. So hopefully the message is that planning correctly with your retirement plan can preserve some significant funds for future generations. The rules surrounding retirement plans are complicated enough, so don’t compound the difficulty by making beneficiary form mistakes. When a significant portion of your assets consist of a retirement plan, you should get expert help.