Mary, a widow, had contributed to her IRA for many years. It
grew to over $275,000. She chose to make her contributions to a bank,
whose name will not be mentioned, to make sure her IRA would be safe and
not exposed to Market risk. Mary had one son, Erik, and a step daughter
from her deceased husband. Her bank advisor recommended that she name
her estate as beneficiary so her will would pass her IRA to Erik after
her death. Sounds reasonable, but this advisor’s advice would eventually
cost Erik unneeded time, expense, and risk.
When Mary passed; her IRA became part of her estate and
subject to the terms of her will. Her intention was for Erik to inherit
all of her assets. When her husband died eight years earlier, he left
some of his estate to Mary and a big chunk to his daughter from his
prior marriage. In Mary’s mind, it only seemed fair that her son
received her IRA and other assets to create balance, in light of the
fact, that her step-daughter had already received a sizable amount of
inheritance when her husband died.
Neither Mary nor her son Erik, were aware that naming the
estate instead of Erik would force her IRA into probate, along with her
other assets. Probate can be expensive and during probate, anyone can
file a claim for some or all of Mary’s assets, putting Erik’s
inheritance at risk. You can guess the rest of the story; Erik’s step
sister challenged the will and claimed that she is entitled to some of
her step mother’s IRA.
This is not an unusual situation; In fact, it’s common to make this mistake! In this case, Erik’s inheritance is up for grabs.
Advisors Action Plan:
Look for IRA beneficiary documents that are structured for failure. Fix the problem and you will be the trusted advisor.
