Many people are surprised to learn that even a will or a trust may not control the distribution of savings held in IRAs. Fortunately, IRAs can easily transfer to your loved ones outside of probate simply by completing a beneficiary designation form. The IRA will be distributed the person or persons you designate. The forms must be kept current, because the IRA will go to the person whose name you put on the form even if you have since divorced that person or written them out of your will.
What if a beneficiary designation form has not been completed? How do the heirs or the executor figure this one out? The good news is that many accounts have a built-in default to the surviving spouse or children of the owner. So, just like the state, if you don’t have a plan in writing, the IRA has a plan for you. Problem: What if that runs contrary to your estate plan? Alternatively, what if the account has no default? In all likelihood the account will then default to your probate estate and will be treated as any old bank account going through probate.
Aside from probate itself, there are lots of rules regarding how IRAs can be inherited and used by the inheritor. They must take distributions just like you do, but when the IRA defaults to your probate estate it gets complicated – and fast. This may mean that a big tax bill comes due immediately and your savings no longer enjoy any of the protections from creditors that the IRA provided to you during your life.
The IRA can be assigned or transferred into a properly titled new account, but then again some IRA custodians simply refuse to do this, making the irreversible and catastrophically taxable choice to distribute the entire account to the estate. Simply put, an IRA not acting like an IRA within the estate plan is messy. It can be easily avoided by filling out the beneficiary form and keeping it up to date.
The best way to avoid the risk of unhappy and unexpected results is to put your wishes in writing by keeping IRA beneficiary forms and wills and trusts complete and up to date. If you don’t put your plan in writing, the assets you have worked hard to earn will not be distributed according to your wishes, but by rules of the IRA and laws of Georgia. By consulting with loved ones and qualified legal and financial professionals, you can develop a plan for the future and execute the best documents to make your plan a reality. The time to start is now.
James M. Miskell received his law degree from the University of Georgia in 1993. His Asset Protection and Estate Planning Law practice is located in Lawrenceville, Georgia. He offers free educational workshops and consultations to assist clients as well as fellow professionals in creating individualized solutions.