I want to share a story with you about the importance of having a living beneficiary. Too many times to count, we’ve seen beneficiaries listed that were deceased.
We worked with a gentleman who was in his late 80s. He was a former widower who had just recently remarried. We knew he had substantial assets in his IRA, so we reviewed and clarified beneficiary designations and his wishes for them after his death. We found that his first spouse, who was now deceased, was still named as the beneficiary on every account. And even worse, he had no contingent beneficiaries named at all.
The Big Problem
Regardless of where he wanted his assets to go (which was to his kids), they were logically and legally not going to his deceased spouse. Unfortunately, upon his death, his IRA would most likely have ended up in court with his kids fighting with his new bride over his assets. As you can see from the story, it is very important to always name a living beneficiary for your IRA. (Pre- or post-widowhood reviews of beneficiary designations are vital.)
When someone dies without a beneficiary named for their IRA, the money gets paid out to their estate. This may or may not have adverse consequences. (An exception is if the custodian’s IRA agreement has language regarding default beneficiaries. However, the beneficiary may not be who you intended them to be).
What If the Estate Inherits?
If an estate inherits an IRA, the IRS requires that all the money be cashed out by the end of the fifth year after your death.
In this case, you could lose the potential tax-sheltered growth an eligible designated beneficiary or non-eligible designated beneficiary would have. Also, the beneficiary might end up being someone you’d rather not have inheriting the IRA
The above article originally appeared as a chapter in Inheriting Your Spouse's IRA and is reprinted with permission from the author Bill Harris, RMA®, CFP®. No parts of this article may be reproduced without correct attribution to the author of this book.
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