Neal Frankle
Neal Frankle
Confirm Your Client’s IRA Beneficiary Form Is Completed Correctly

Why now is now the perfect time.

March 18, 2010
by Neal Frankle, CFP

Two reasons.

First, they’re still alive.

Once they’re gone, the mistakes they made with their individual retirement account (IRA) beneficiary forms can’t be undone. (Being alive has its advantages sometimes.)

Second, it’s tax season and they are probably going to contact their IRA custodian to make contributions. So while they’re at it, why not make sure everything is set up properly?

Let’s say your client gets sick and tired of their husband playing the ponies instead of paying the bills so she divorces the slob. After the divorce, she updates her trust but forgets to update the IRA beneficiary form. If she dies, the IRA still goes to her ex-husband — and shortly thereafter, probably to the people who own the race track.

So, in the worst case, the money she worked hard for could end up in the wrong hands.

Mistakes made here could force the IRA beneficiary to pay taxes on the money, years and years before they would otherwise have to. Now that I think about it, I have a tragic story to share with you that illustrates the importance of naming the IRA beneficiary and filling out the IRA beneficiary form correctly. This case came up only a few months ago.

Dan, a divorced man was dying of cancer and had only a few months to live. When he divorced his wife, he named his minor children as his IRA beneficiaries. He died but his wife got control of the money anyway.


Simple … the kids were minors. The ex-wife was the kids’ guardian so she got to call the shots with “their” money. They had no control.

This is an extreme example of how things can go wrong but still illustrates the importance of being super mindful when it comes to your IRA beneficiary forms.

Let’s look at more mundane situations and some alternatives.

Let’s assume instead that Dan’s kids were over 18 and they are the beneficiaries. When they inherit Dan’s money, they could take it all out whenever they want, but also they have the opportunity to continue growing most of the money as tax deferred.

How could the IRA beneficiary still lose out?
If Dan named his estate as beneficiary, the money would have to be withdrawn much faster — probably over five years. In this case, the money would go to the beneficiaries of the estate. Of course, that would entail legal fees, court costs and delays PLUS eliminate the benefit of continued tax deferral. It’s just about the worst of all worlds.

Wait … there is a situation that’s even worse.

That’s if Dan fails to name any beneficiary. This situation would have to be resolved with lawyers and courts. It would needlessly consume lots of time and money. So it’s best if avoided.

Now, let’s get back to Dan’s real situation and consider using a trust as a beneficiary.

Normally, I would never recommend naming a trust as an IRA beneficiary. But if your beneficiary needs special protection, like they did in Dan’s case, the trust might be the way to go.

Using an IRA beneficiary trust gives you more control. For example, even though the kids are minors and still under their mother’s control, an IRA beneficiary trust can name anyone to be the trustee. This way, the ex-wife doesn’t end up with the money.

There are downsides to using an IRA beneficiary trust. It costs money to set up and you can lose some of the tax deferral time.

In Dan’s case, the trust would have been the way to go. His kids would have had a few fewer years to continue the deferral, but it would not have been significant. In exchange, they would have been able to keep their mother’s paws off the loot. A good trade-off for Dan and the kids.

Even if your clients think they have the IRA beneficiary forms set up correctly, do yourself and them a favor and confirm it. I further suggest you do this every five years.

Do you have any IRA beneficiary horror stories to share? When is the last time you checked to make sure your IRA beneficiary forms were completed correctly?

The material in this article is general information and not meant to provide specific investment, tax or legal advice. Investing in the stock market involves risk.

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Neal Frankle is the author of Why Smart People Lose a Fortune: 5 Steps to Restoring Your Wealth and Sanity. If you would like to help your clients plan for retirement, consider contacting Neal.

The material in this article is general information and not meant to provide specific investment, tax or legal advice. Investing in the stock market involves risk.