Confusion With Beneficiary Designations On IRA's And Annuities

IRAIn meeting with clients and reviewing their estate plans, I have noticed many problems with the beneficiary designations on IRA’s, and annuities. Sometimes I have noticed that beneficiaries have not even been named! Sometimes I have noticed that the percentages for the beneficiaries do not add up to 100%. Other times I have noticed that clients have named a Living Trust as either the primary or contingent beneficiaries of their plans.

Another problem that I encounter with beneficiary designations is that someone has named their “estate” as the beneficiary. I would like to reiterate that “estate” is a technical term. Typically, estate is defined by the beneficiary documents as the “probate estate”. In order to have a probate estate, I have to admit a will in the local probate court and begin the probate process in order to allow the proceeds from the IRA or annuity to be paid to the “estate”.

Due to naming an “estate” as the beneficiary, the IRA or annuity will now have to go through the probate process. This is completely contrary to why most people create an estate plan. Instead of avoiding probate, you are now forced into probate. When someone names the estate as a beneficiary, not only must an estate be opened, but there are also federal and state income tax ramifications that must be addressed which could have been avoided by naming the proper beneficiary.

I recommend that you review your beneficiary designations every five years, or if there is a major life changing event, such as a birth of a child or the death of a spouse.

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