IRA Beneficiary Designation Blunders and How to Avoid Them (Irrigation Analogy and Forbes Article)

May 4, 2015 - Posted by: admin - In category:

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Mistakes With Beneficiary Designation Forms Have Ruined Many a Good Estate Plan

Consider a scenario where a person who has substantial retirement assets and life insurance retains a highly skilled estate planning attorney to design and implement a highly customized and in all respects masterful estate plan. The person’s estate plan is drafted, signed and implemented…but there is one major problem. In this instance, the major assets for which the estate plan was so very carefully designed and implemented, namely the IRA and life insurance, are never legally “connected” to the trusts which comprise such estate plan. I use the term “connected” to indicate that unlike other assets such as real estate, bank accounts and other items which are customarily re-titled into the name of a trust as part of the asset funding process, retirement accounts and most life insurance products (including annuities) are normally NOT re-titled into the name of a trust at the outset (if at all) and are instead connected to the applicable trust entity through proper use of beneficiary designations. Exactly how this is done varies from person to person and according to a variety of circumstances, but the common theme with these special assets (i.e. retirement accounts and life insurance products) is that beneficiary designations can make or break every estate plan. This is true for almost every estate plan, from basic to the most intricate.

To understand this point, please imagine an irrigation system that waters an orchard of prize-winning fruit trees. Notwithstanding the amount of time, effort and expense that is expended on the nurture and care of the fruit trees, including the  intricate and carefully laid-out irrigation ditches designed to impart the exact amount of moisture needed by the trees, it all goes to naught if things are not properly implemented upstream. In other words, if there is no diversion from the canal above to the ditches below, the water never gets to the trees and the ditches remain empty and the trees die. Total waste. Tragic result that could have been very easily solved if someone had simply put an appropriate amount of time and attention into ensuring that things were arranged upstream as well as downstream.

This example directly relates to beneficiary designations. The carefully designed and implemented estate plan is like the fruit tree orchard and the network of carefully dug and maintained irrigation ditches. The beneficiary designations are the upper part of the irrigation system, which channels water from the canal down to the appropriate ditches and eventually on to the orchard and the network of ditches. Mistakes made upstream at the level of the beneficiary designations can block and prevent any flow of assets down the desired channel. Again, what happens downstream is totally dependent on how things are arranged upstream.

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