IRA Beneficiaries – How To Safeguard Yourself and Family

by Neal Frankle, CFP ®

How you select and name your IRA beneficiaries is a central part of your estate plan. Understanding these IRA restrictions is the only way you can make sure your beneficiaries will get the money when you’re gone. I recently received an e-mail from “P” pointing out how important this issue is:

“My sister asked my dying brother to make a call and change his beneficiary before he died. He did so and as a result, I and my other family members were left out. How did this happen?”

P…eh…it didn’t happen.

Your brother had to sign something in order to change the beneficiary. If your sister received all the money from his IRA it’s because the custodian had a document that named her as beneficiary with your brother’s signature.

Either he signed it before he died and didn’t tell you or someone else signed his name for him. That’s the only way to change a beneficiary. I’m sorry…but the only recourse you have is to try to prove that the signature on the beneficiary form is not your brother’s.

Another e-mail I received asked if it was OK to name a Family Limited Partnership as the beneficiary of an IRA. The person who wrote the e-mail, Ed, said he wanted to make sure that three (out of four) of his children get the IRA assets when he goes. First to answer Ed’s question.

The custodian I use doesn’t have any mechanism to process Family Limited Partnerships as IRA beneficiaries. You could check around with other custodians, but I didn’t see any information on the net so I’m not hopeful.

But my main issue is, why name the FLP? You could name a trust if you absolutely have to. But when you name the trust as beneficiary, you open up a can of worms and limit the options for your beneficiaries.

If you’re lucky and the trust is written correctly, the custodian will “look through” the trust and allow each of the beneficiaries to set up their own Beneficiary or Inherited IRA account. But their distributions will be based on the oldest of the three and there is no reason to be subject to that. This is just one of the mistakes that people make with Beneficiary IRAs.

My suggestion is to name each child beneficiary of the IRA directly. As an alternative, you can split the IRA up now in o three accounts and name each one beneficiary on each single IRA.

What am I missing? Do you have other suggestions for P and/or Ed?

These are two examples (of many) where folks let a minor formality complicate their estate plan. There are a number of IRA beneficiary rules that people need to know about…but don’t. The best bet is to seek out competent advisors, especially when it comes to your beneficiary form. It is no less important than your trust or will.

OK…now that I’ve gotten that off my chest, let’s get on with the weekly Parade of Pilgrim Posts.

Before I get started, I’m going to give a special shout out to me.

 

Vinni, Flikr0

 

I wrote a piece over at Five Cent Nickel that I’m especially proud of. It’s called, What I Learned About Money From Tinky Winky. I just loved writing it. In fact, I’d been thinking about that post for a few years but never had the gumption to get ‘er done. Thanks, Nickel, for having the grit to put it out there. I had so much fun writing it my wife thought I was over the edge. (She just saw me typing and heard me cracking up…she started worrying.) Check it out and let me know if you enjoyed it as much as I enjoyed writing it.

On to the Pilgrim Posts on Parade:

Carnival of Personal Finance

Festival of Frugality

Moneyed Up tells us how to pay off our mortgage faster.

Buy Like Buffet talks about the shrinking middle class.

Budgeting in the Fun Stuff – A Teacher’s Reply

Good Debt vs. Bad Debt – Young & Thrifty

Barb Friedberg talks about how to reduce financial stress and get rid of dysfunctional behaviors.

Darwin’s Money – Tool for Estimating Your Taxes under Obama’s New Tax Plan

Carnival of Personal Finance

Joe Taxpayer, The State of Estate Tax

Debt Snowball Explained – MH4C

Free From Broke talks about dollar cost averaging.

Sweating the Big Stuff provides great insights into using silence as a negotiating tactic.

Green Panda, Should I Borrow Money From My Family?

Investing IN Retirement vs. Investing FOR Retirement. Interesting take by Canadian Finance Blog.

2011 Tax Brackets – Mike@Oblivious Investor

Digerati Life – Is a Liberal Arts Education Worth It?

 

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{ 11 comments… read them below or add one }

The Digerati Life August 4, 2010 at 12:11 PM

Awesome! I love the Teletubbies — reminds me of that phase when my kids enjoyed the show as toddlers. I’ll have to catch your article at Nickel’s.

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Mark July 31, 2010 at 3:39 PM

Thanks for the link Neal!

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Barb Friedberg July 31, 2010 at 4:12 AM

Hi Neil, thanks for including my post on dysfunctional money behaviors :)

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Quang cao truc tuyen July 31, 2010 at 2:37 AM

thnaks for sharing, that good

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Craig/FFB July 30, 2010 at 6:04 PM

I’ll have to check out the Teletubby article!

Thanks for the mention too.

We have to do some estate planning ourselves. We’ll keep this article in mind.

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Spokane Al July 30, 2010 at 9:32 AM

With my Vanguard accounts I can make IRA beneficiary changes over the phone or on line. There are no signatures required. I just verified this info with a Vanguard representative.

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Neal@Wealth Pilgrim July 30, 2010 at 10:41 AM

Spokane Al,

That really frightens me.

What they do is record everything and then if there is a problem, believe me…they won’t be able to retrieve it.

In your shoes, I’d demand a written document. In fact, that’s so important that I’d change my investments if I had to in order to get that beneficiary info on record.

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Tom @ Canadian Finance Blog July 30, 2010 at 8:28 AM

Thanks for the link Neal!

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Budgeting in the Fun Stuff July 30, 2010 at 5:47 AM

Thanks for the mention! Have a great weekend! I have to go check out a personal finance post about TeleTubbies…

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Mike Piper July 30, 2010 at 3:48 AM

“My suggestion is to name each child beneficiary of the IRA directly.”

Yep, makes sense to me.

“But when you name the trust as beneficiary, you open up a can of worms and limit the options for your beneficiaries.”

Thumbs up for mentioning this. I suspect it gets overlooked sometimes.

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Neal@Wealth Pilgrim July 30, 2010 at 10:39 AM

Thanks Mike! Coming from you…that is a compliment indeed!

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