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Elderlaw: 10/01/2018

Elderlaw Advocates Oct. 1, 2018

Dear Readers,

On occasion, we like to address important estate planning issues instead of answering our readers’ questions. Today we will discuss the importance of naming beneficiaries to your IRA’s and other retirement accounts. We begin with a story:

Once upon a time, a client, a retired physician, was diagnosed with a terminal illness. He had only weeks to live. In reviewing his estate plan we discussed with him his IRA, worth in excess of $400,000. He convincingly and repeatedly stated that he had named his brother as beneficiary, and that was what he had wanted. Nevertheless, we insisted that he verify this with his IRA custodian. If you are a client of ours, you may have felt we harped about this sort of thing, perhaps too much. Here’s why we do it.

The client passed weeks later. Convinced that he was right, he never contacted his IRA custodian. Not too long after his death, when his brother contacted the custodian and provided it with a Certificate of Death, he was given the unfortunate news that his late brother didn’t name him as IRA beneficiary. Instead he had named their parents, who had both passed decades earlier.

The result of this is that instead of the brother being able to roll the IRA over into an Inherited IRA for himself, it became necessary to probate his late brother’s estate in the courts. Instead of collecting the account for free, the IRA took a year to transfer to the brother, and the lawyer fees in probate, which are set by state law, came to be in excess of $11,000, with an additional $1,500 or so in court costs and Probate Referee fees. It was what trust and estates lawyers call a “nice little probate.”

In some cases it can be worse. If the circumstances had been different, the estate could have been required to cash in over $400,000 of deferred income during the five year period following the death, or even all at once, costing the brother any opportunity to defer income tax on all that money.

Our advice to you is this: Do not rely on your recollection as to whom you named as beneficiaries of your IRA, 401(k), 457 Plan or other tax deferred retirement accounts. Failing to do it correctly may be the most expensive mistake you can make, not for you, but for the persons you want to leave the money to. If you think you did it right, please check anyway. Maybe you named your niece as beneficiary before you had children of your own. Maybe your ex-husband is beneficiary. Trust but verify.

If you do check, and you learn that your account wasn’t set up the way you thought it was, please drop us a note, or send us and email. We’d rather tell the story of a person who did things the right way instead of this cautionary tale.

Len & Rosie

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at Len also answers legal questions each weekday, Noon-1 p.m. and Sundays, 4-7 p.m. on KGO Radio 810 AM.

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