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Common Estate Planning Mistakes Regarding Life Insurance and Individual Retirement Accounts (IRAs)
For many people, life insurance and/or retirement savings accounts are among the largest assets they have to bequeath to their children and grandchildren in their estate plans. Sadly, without professional and personally tailored advice about how best to include life insurance and IRAs in one’s estate plan, there may be a failure to take advantage of techniques that will maximize the amount of assets that will be available for future generations. Here are some key considerations to reflect upon and make sure that they are implemented in your own estate plan.
Failure to Name and Update Beneficiaries
A death benefit of a life insurance policy and the assets in an IRA account usually transfer automatically to the named beneficiaries upon the death of the account holder, outside of the probate process.
“Outside of the probate process” are the key words. In other words, the funds pass directly to the named beneficiary, outside the parameters of the Will and succession of the decedent. Normally, all the beneficiary has to do is fill out a claim form, and they get the funds in a matter of weeks. Usually this is done without the attorney for the succession being involved, which means less legal fees owed by the Estate. But, this only happens with a named beneficiary. Thus, it is imperative to make sure that you have beneficiaries named for these accounts and to remember that situations do change.
If the account holder’s desired beneficiaries change, due to marriage, divorce, or other major life events, it is critically important to update the named beneficiaries as quickly as possible to prevent the asset from passing to an outdated beneficiary. Or, in the case of death of the primary beneficiary, it is equally important to name contingent beneficiaries, who stand in the place of the primary beneficiary in case he/she predeceases the decedent. The account holder should also be aware that circumstances change for the contingent beneficiaries as well.
Let me give an example to show you how important updating beneficiaries can be. I had this issue just come into my office the other day, and had to inform the family of this horrible result.
Example:
Sarah has an IRA in excess of $650,000. Sarah’s IRA documents name her husband, Harold, as the primary beneficiary of her IRA and Harold’s son, George, from Harold’s first marriage, as the contingent beneficiary.
Sarah and Harold divorce.
After the divorce, Harold’s son, George, hates Sarah for divorcing his father, and is very ugly towards her for a number of years, even refers to her publicly as the “devil”.
Harold dies.
Sarah, both after the divorce and after