Is This Simple But Costly Mistake Lurking in Your Clients’ IRAs?

Let me tell you about a couple I knew who were married for 34 years. They managed to raise and educate four children through college. He retired from his first career early due to heart disease and then began a second one as an accountant. Years later, she also retired and was ready to enjoy life with her husband as a homemaker. Unfortunately, he died unexpectedly while doing the job he loved, suffering a massive heart attack literally at his desk while working with clients.

She was devastated and had the most difficult time coping with this sudden tragedy. Luckily, they had put away some money over time and most of it was in IRAs established years earlier, which had grown nicely. One of the great things about IRAs is that they can be easily transferred to beneficiaries without going through the timely and expensive probate process.

But this couple never named beneficiaries for their IRAs. They just assumed that the surviving spouse would inherit the deceased’s money. Then the reality of this costly mistake hit home. Unless the spouse or child is named as the beneficiary, the money must go through probate court. His IRA could not simply be rolled over into hers. The result? Income taxes were due on the entire amount instead of being able to defer them until much later. And those taxes dramatically reduced what she had hoped to receive for her grandchildren and her own living expenses.

This often happens when people forget to update their IRAs and wills. Money that could be passed down to subsequent generations becomes snared in the probate process. Parents or grandparents whose bank and IRA accounts still carry the beneficiary designation of “per stirpes” or left to “the estate” of the deceased will cause headaches and potentially cost hundreds or thousands of dollars unnecessarily.

Few parents would want their children to suffer due to the unnecessary early payment of income taxes on their hard-earned savings. Even worse, there are often cases when, after a divorce, beneficiary designations are forgotten about. Then, when a death occurs, money may actually go to the “ex” and his or her new spouse instead of the children of the deceased.

Ensure your clients don’t make this mistake with their beneficiary designations and protect them from unnecessary hassle.