Q: I'm finally getting around to writing a will, something I realize I should have done years ago. My biggest assets other than my house are my IRAs. I've never done any estate planning. Are there any common mistakes to avoid? --EM via email
A: Indeed there are, and none are more common than those involving IRAs!
Your first step should be locating a good estate lawyer. (I've explained how to do that in this earlier post.) Contrary to popular assumption, not every lawyer is qualified to write a will, says Stephen J. Silverberg, immediate past president of the National Academy of Elder Law Attorneys. "Estate planning is a legal specialty, just as cardiology is a medical specialty."
Step two: Take copies of your IRA beneficiary designation forms with you. Ask the lawyer to read them, make sure you've filled them out correctly, and explain the fine print. Those forms are the legal documents that determine who gets your IRAs -- not your will!
If you don't have copies of your beneficiary designation forms -- and most people don't -- now is the time to get them, says Silverberg.
Most people assume their bank or broker has these forms on file and can easily retrieve them. Don't be so confident that your financial provider is more organized than you are! Misplaced forms are a longstanding problem, says Ed Slott, a tax accountant and IRA expert: "Banks and brokers go out of business, financial advisers are laid off, and client forms are lost." Silverberg recalls one case in which a brokerage finally located missing IRA paperwork in a cardboard box under the office coffee machine.
What if the forms are missing? No problem -- as long as you're alive. You can just fill out new ones.
The reason so few people ask the lawyer who draws their will to read their beneficiary designation forms is that they mistakenly assume that their will supercedes whatever the forms say. Lawyers know better. Nevertheless, "I'd say 90 percent of lawyers who prepare a will don't ask to see the client's IRA beneficiary form," says Silverberg.
The wording of beneficiary designation forms varies from one financial company to another, but its main purpose is to protect the bank or brokerage that serves as IRA custodian -- not you or your family.
Your lawyer should make sure that the fine print won't cost your kids money.
For example, if your heirs decide to move the IRA to a different custodian, they must do it in a direct, trustee-to-trustee transfer to avoid triggering taxes. Some banks don't allow beneficiaries to do this type of transfer, says Slott. "They'll only give your children a check for the whole IRA, which makes it immediately taxable."
If your custodian doesn't let IRA beneficiaries do a tax-free transfer to its competitors, you can -- and should -- move your money to one that will. As the IRA owner, you can do a tax-free transfer anytime you want.
Your lawyer should also make sure you filled out the beneficiary form clearly and correctly.
Slott remembers a situation in which six siblings inherited their mother's $600,000 IRA. Her beneficiary form listed their names, but it didn't specify how large a share of the account each child was to receive. "The bank decided the first named child was the primary beneficiary, and the others just contingent beneficiaries," says Slott. "It paid the entire IRA to the oldest child. To divide it with her siblings, she had to withdraw the money, paying more than $240,000 in taxes that could have been avoided if the mother had just put two words on the form: 'equal shares.'"
Your lawyer should also make sure these forms allow your heirs to name successor IRA beneficiaries. That way, if your grandchildren prematurely inherit the accounts, they can continue taking distributions from your IRA based on their parent's life expectancy. The law permits that -- but some custodians' rules do not.
Again, if you're not satisfied with the bank’s rules, move your IRA to another provider.
(Part of this post is based on my article 'Who'll Get Your IRA?' published last year in AARP The Magazine.)
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.
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