Even though many people hire lawyers to prepare wills and trusts they often fail to plan their IRA beneficiary designations. When someone dies owning an IRA, one of the most fundamental questions is who was named as beneficiary. From forgetting to fill out beneficiary designation forms or failing to update their document after a divorce or death of a beneficiary, such financial fumbles can force future generations to surrender too much to Uncle Sam -- or worse, deny them their rightful inheritance.
How could an IRA account fail to name a living beneficiary? There are a myriad of reasons. For example, Dad and Mom names the other as beneficiary on their IRAs. One of them dies and the survivor fails to change the beneficiary designation on the survivor's IRA. It is also common that when Mom or Dad dies the beneficiary survivor rolls the IRA proceeds into survivor's IRA or a new rollover IRA, but fails to name a living beneficiary on the survivor's IRA account. Commonly, forgetting to update estate planning information following the death of the beneficiary is one of the most common blunders when it comes to beneficiary forms.
When an IRA doesn't have a beneficiary, the financial institution will typically look at its own contract with the IRA owner to determine how that account will be distributed after the owner's death. The terms of these agreements vary widely. Sometimes, if there is a surviving spouse the surviving spouse is the default beneficiary; occasionally the account defaults to the children if the spouse is not alive.
However, you can't count on the contract arrangement. Most custodial agreements provide that the account is payable to the account owner's estate. More often than not it is paid to the deceased's estate. There are two reasons why this result is unfortunate.
- First, if the IRA becomes part of the deceased's estate, then it has to go through probate before it can pass to the deceased's heirs, either testate or intestate.
- Second, having the deceased's IRA pass to the deceased's estate rather than to a designated beneficiary can severely limit the benefits that your heirs get from the account.
Clients often assume that naming heirs in their will is sufficient and that there is no need to duplicate those beneficiaries in their IRAs. This is far from the truth. You must have an IRA beneficiary designation to mirror your will beneficiary designation, if that is your intent.
If you wish to gain more information on California probate or you need legal assistance regarding the final disposition of tax deferred account proceeds (such as an IRA, 401(k) plan, deferred compensation and savings plan or 403(b) plan), where there is no designated beneficiary, please contact me for a free consultation. I will spend time with you to answer your questions. From my office in Southern California, I represent families in all Southern California counties, including Imperial County, Los Angeles County, Orange County, San Bernardino County, San Diego County, others spread across the state and interested parties outside California.