A very simple $400,000 mistake
July 14, 2014
by Brian Wolf

It’s been over 25 years now that I’ve been coaching, teaching, preaching, and screaming from the mountain tops that everyone needs to make sure their beneficiary forms are set up correctly. There are a lot of misconceptions when it comes to retirement plans and the legal issues after you pass away. Most of the time, people will get it wrong and many times even financial advisors and attorneys will get it wrong, as well. Take a look at a recent Yahoo Finance online column, for an example.

Before Leonard Smith lost his battle with cancer in 2008, he worked with his financial advisors and attorneys to make sure his children received the balance of his retirement funds when he died.

A single mistake, however, thwarted his well-laid plans. Family members realized a year after he died that his IRA beneficiary form was filled out incorrectly. Instead of specifically listing the names of his children along with the percentages designated to each heir, Smith wrote, “To be distributed pursuant to my last will and testament,” where the disbursement of funds was spelled out.

But, Smith’s failure to complete the form correctly invalidated the document, making his surviving spouse the beneficiary by default. 

“I had no idea that a will could be trumped by an IRA beneficiary form,” Deborah Smith-Marez, 50, Leonard’s daughter, told Yahoo Finance. 

Smith-Marez and her siblings fought in court to recover the money, but the court awarded the $400,000 in the IRA to their father’s wife, who married Smith two months before he died.

Like Smith-Marez, many Americans are unaware that long-forgotten beneficiary forms can override wills, and undermine their loved ones' intentions.

How does this happen? Beneficiary forms are meant to be a straightforward method for heirs to bypass the probate process and receive funds in a timely manner. But, sometimes, account holders forget they’ve filled out these forms and fail to update them with major life changes.

Your estate is governed separately from your accounts with beneficiary designations, which include retirement accounts, life insurance policies, bank accounts, certificates of deposit, stocks, annuity contracts, bonds, and mutual funds. So, if your last will and testament designates one person as the beneficiary and your IRA designates someone else, the IRA will outrank stipulations in your will. 

Americans now store more and more of their wealth in retirement accounts, with $6.5 trillion held in IRAs, and $5.9 trillion in employer-based defined contribution plans like 401(k)s, according to the Investment Company Institute; all of which require beneficiary forms to designate recipients upon the account holder’s passing. 

Unfortunately, there are no automatic reminders to update these forms on a regular basis – the account holder has the responsibility to keep them current and valid. 

Over the years, I have seen plenty of estates that were “contested” in the courts. The word “contested” by the way, is simply a nice way of saying that people are viciously fighting over stuff.

I have personally witnessed many estates that have been fought over for years, whether its money or worldly possessions, the effect of this process can extract an enormous emotional toll on loved ones.

Here are some good ideas to follow.

1. Meet with a qualified retirement planning advisor at least once a year to review any changes that might have taken place; birth, death, marriage, or divorce.

2. Make sure you use proper percentages for beneficiaries and use the per stirpes language.

3. If the names of the banks or institutions that the money is being held at changes, you should fill out new forms, as well.

4. Make sure you have hard copies of all these documents.

5. Don’t assume that an attorney or financial planner knows how to do this properly, very few advisors do this on a regular basis. There are state specific rules and lack of experience is often why things are missed.

If you have any questions about how to proceed, don’t hesitate to give us a call and we will gladly review all your documents at no cost.

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