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.

A June 2014 United States Supreme Court ruling (Clark v Rameker) has addressed and more clearly defined the differences and rights associated with Regular (or Roth) and inherited Independent Retirement Accounts. The debate begin in October of 2010 when Heidi and husband Brandon filed for bankruptcy and claimed the inherited IRA which came from Heidi’s mother, worth 300,000 dollars, as exempt from collections. Refuted by bankruptcy trustees and creditors, the case quickly made its way through the court system and soon reached the Supreme Court.

An inherited IRA is innately different than a Traditional or Roth IRA in the sense that it is received all at once (and in the case of the Clarks, can be withdrawn all at once as well- having no limitations set in place upon receiving the inheritance) while the latter are built and contributed to over a lifetime. The Supreme Court unanimously ruled that because of this very matter, an inherited IRA is no longer protected and is “an opportunity for current consumption, not a fund of retirement savings.” Meaning that these IRAs are now considered an asset when bankruptcy is filed, making it even more important to know you legal rights, and safeguard existing IRAs through stand alone IRA beneficiary trusts.