For many Kent residents, an individual retirement account may be their most significant personal asset. A person's IRA often represents both a source of retirement benefits and the source of an individual's legacy to heirs. Because IRA assets pass directly to designated beneficiaries, they can provide a convenient way to avoid the complexities of estate administration. Unfortunately, people commonly make simple mistakes when it comes to naming the beneficiary of an IRA that can lead to unintended consequences.
One of the most important points IRA holders need to remember is to make a point of periodically reviewing beneficiary designations. Designations may need to be changed in the event of marriage or divorce, the death of a beneficiary, or other significant life events.
Another common IRA mistake is naming the account holder's estate as the beneficiary. Not only does naming the estate as a beneficiary have the effect of making the account subject to the complexities of probate proceedings, it also deprives heirs of opportunities to capitalize on asset growth and minimize tax consequences.
In some cases, it may be a mistake to nominate an heir as the direct beneficiary of IRA assets. Establishing a trust to receive account funds can provide an opportunity to set conditions on the distribution of assets. There may be some fees associated with ongoing trust administration, but the long-term benefits to beneficiaries and trust assets may be worth the added expense.
Along the same lines, people often overlook the importance of naming a guardian to supervise assets on behalf of a minor beneficiary. If a particular guardian is not specifically identified, it will fall to the court to choose and appoint a legal guardian for minors' assets.
Finally, and perhaps most importantly, account holders need to make certain that some trusted person, such as the executor of the estate, knows exactly where to find IRA documentation. If nobody can find beneficiary designation forms, all the planning in the world will be to no avail.
Source: Fox Business, "Five Biggest Mistakes Not to Make on Beneficiary Forms," Shelly K. Schwartz, Feb. 11, 2013