A Costly Mistake with IRAs

While many people are intimidated by the literal and emotional process of creating a will or managing their estate, even fewer long to tackle the task of maintaining these legal documents. Unfortunately this can result in very costly mistakes, and few realize that the terms of their IRA supersedes what they have outlined within their will. So if your will designates a certain individual as your beneficiary and the terms of your IRA designate a different individual, the IRA will outrank your will despite which was written or adjusted last. It is vital for the account holder to be aware of life changes that consequently require adjustments to be made to their will or IRA terms.

An example of the losses that can be associated with making such a mistake is management of Leonard Smith’s IRA inheritance before and after his death. Smith worked up until his time of death (in 2008) with financial advisors and attorneys in order to insure that his children would receive the balance of his retirement fund. A year after his passing, family members discovered that Smith’s IRA beneficiary form had one mistake on it, making the document invalid. This in turn made his surviving spouse the sole beneficiary by default. Although his children fought to maintain their inheritance in court, the judge ruled that the $400,000 IRA would be awarded to Smith’s wife.

Hindsight is 20/20, however it is important that a lesson is taken from the unfortunate circumstance that the Smiths faced. Assessing the case it is important to follow a few easy steps in order to safeguard your IRA and insure that it is inherited by the correct beneficiary. You should make sure to annually set time aside to review and possibly update your beneficiary forms, making sure that documents do not contradict each other, and always keep hard copies of all documents. (It is also important to make sure that you designate percentages among beneficiaries, or specify “in equal shares” to split it equally). It is also helpful to stay up to date with the institution where your money is being held, as changes internally may result in the necessity of a new form. Ultimately it is also important to at the very least consider hiring a certified estate planner, taking much of the guess work associated with wills and retirement out of the equation.