One thing you should absolutely do today:


If there is one thing that trips up the passing of assets upon the death of someone and causes significant tax consequences, it is that the listed beneficiaries are not current on IRAs/401(K)s, Life Insurance policies, etc.  In the very near future…TODAY, you should contact your financial advisor and make sure that your beneficiaries are current.  Major problems have been caused by the discovery that an ex spouse was still the beneficiary of an IRA/401(K) or life insurance policy or that not all of the children were listed as designated beneficiaries on IRAs.  That is first and foremost the most common issue with the death of someone when your heirs find out they are not going to get the assets you intended they get.  The implications are not just that your IRA may not go to the person or people you want, but there are major tax implications and available tax savings if you stay on top of your beneficiaries and actively look at your plan for your IRA/401(K)s.  Before I go any further with other valuable information, call your financial advisor and make sure you have listed the correct people as your beneficiaries.  Do not leave it to a will and do not just state your “living children”.  You must designate your beneficiaries by name directly on your IRA/401(K) accounts.  If you have designated beneficiaries named, make sure you have not had more children that have been left out.  You should also designate contingent beneficiaries.

IRAs are very different in their tax treatment after the death of the owner.  If you do not have a surviving spouse, the IRS becomes the most likely recipient of a major amount of your IRA/401(K) estate.  Without proper planning, the IRAs will cause income on which taxes will be due and then the asset is gone with a substantial check made out to the IRS and the missed opportunity for continued tax deferred growth in the IRA for the intended beneficiaries.

The second mistake with IRAs is that the beneficiaries cash them out.  This causes a substantial tax liability that could be mitigated and substantially reduced with a little planning.  When you inherit an IRA, you do not have to cash it out and pay the taxes on the entire amount.  You can set up a Beneficiary IRA and stretch the period over which you take distributions.  This can 1) reduce the immediate tax liability on an inherited IRA, 2) allow the IRA to grow tax deferred over many more years, and 3) be allowed to be passed down to your beneficiaries if you die before it is used up.


When individuals are the designated beneficiaries, they may take distributions over their own life expectancy.  If the primary beneficiary has a successor beneficiary in place at death, the successor beneficiary may continue taking distributions over the primary beneficiary’s remaining life expectancy. Without a contingent beneficiary, distributions have to be taken more quickly in the event of the primary beneficiary’s death.  Additionally, a primary beneficiary might choose to disclaim an IRA in favor of their children or grandchildren if they do not need the money.  Such a disclaimer is only effective if the contingent beneficiaries are specifically named as contingent beneficiaries.

There are horrible cases of children not getting their intended inheritances because an ex-spouse was still name as the beneficiary, even if the will states that all of the deceased’s assets go to their children.  Designated beneficiaries will get the assets; the will does not work for these types of assets if your beneficiary is not current and accurate.

Check with your financial advisor today to see if you need to designate your beneficiaries and if they can administer multi-generation IRA strategies.  Banks are not a good bet for secondary and tertiary beneficiaries.  If you can only name a primary beneficiary, you need to find a custodian that can handle naming secondary/contingent and tertiary beneficiaries for this strategy to work.

Forbes: How to leave your IRA to those you love

5 IRA beneficiary mistakes to avoid

Designating IRA beneficiary critical to estate planning


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