Beneficiary blunders

Kiplinger’s Magazine identifies 10 common Estate Planning mistakes:

In a recent probate estate consult, my clients realized the importance of number one mistake:

Not naming a contingent beneficiary on retirement accounts and insurance policies — or failing to review beneficiaries often enough — is my clients’ No. 1 mistake. The default if no contingent is picked is likely your estate, which may be subject to probate, creditors, delays, etc. No contingent beneficiary on an IRA means NO stretch IRA — a valuable tax break that enables someone who inherits an IRA to draw out distributions over his or her own life expectancy — if your original beneficiary has died.

Only a person with a life expectancy can do a stretch. An estate has no life expectancy, therefore, no stretch to minimize taxes and potentially receive significantly more income over your beneficiary’s lifetime.

Forgetting to change an ex-spouse on an IRA can have disastrous consequences for your new spouse or family! (Note, in a retirement plan your new spouse becomes your beneficiary the day you get married, but NOT in an IRA!) If you don’t want your current spouse to be the beneficiary of your retirement plan, then they must agree to you naming someone else. And no, your prenuptial agreement doesn’t matter in this case, because only a spouse can waive those rights, and a fiancée isn’t a spouse yet!

The fanciest estate plan can be defeated by poor coordination of beneficiary and Payment-on-Death designations.