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Man's Mistake Cost His Children $400,000 Of An IRA Inheritance

Thursday, June 26, 2014 - 8:53 PM
From Yahoo Finance:
Before Leonard Smith lost his battle with cancer in 2008, he worked with his financial advisors and attorneys to make sure his children received the balance of his retirement funds when he died.

A single mistake, however, thwarted his well-laid plans. Family members realized a year after he died that his IRA beneficiary form was filled out incorrectly. Instead of specifically listing the names of his children along with the percentages designated to each heir, Smith wrote: “To be distributed pursuant to my last will and testament,” where the disbursement of funds was spelled out.

But Smith’s failure to complete the form correctly invalidated the document, making his surviving spouse the beneficiary by default.

[...}  many Americans are unaware that long-forgotten beneficiary forms can override wills and undermine their loved ones' intentions.

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6
pearlbrownpearlbrown1,436 posts since
Nov 2, 2010
Rep Points: 6,263
1. Thursday, June 26, 2014 - 9:16 PM
This is one point that can never be repeated too many times when it comes to beneficiaries.  We have a Will but I am always concerned that the beneficiary is correct on all forms.  In fact I double check them at least once a year to just give me peace of mind.  I also have typed up info for hubby to stay on top of this if he lasts longer than I do.  Those beneficiary forms, if not done correctly, can bring up screams from the grave!  At least from mine, they will.
3
paoli2paoli21,372 posts since
Aug 10, 2011
Rep Points: 6,011
2. Friday, June 27, 2014 - 7:53 PM
If anyone is following the budget process and the proposed income tax changes  it is being considered that all INHERITED IRA's (not spousal IRA's unless not transferred to the spouses own IRA) must be withdrawn in 5 years. This would be for Roth and traditional IRA's. I do not think it will  pass this year but it will be in the pipeline for the future. You can bet on it. 
2
BradenBraden44 posts since
Apr 27, 2014
Rep Points: 126
3. Friday, June 27, 2014 - 9:13 PM
#2  I don't see how this could possibly pass.  Do you realize the type of huge tax burden this would put on beneficiaries during those 5 years?  Savings we worked so hard to leave to our loved ones will instead be given to the government through taxes.    Is this what is meant by"redistribution of wealth"?    There has to be a way around this but unfortunately, only the very wealthy seem to know the loopholes.
1
paoli2paoli21,372 posts since
Aug 10, 2011
Rep Points: 6,011
4. Saturday, June 28, 2014 - 10:34 AM
You can give your loved ones money tax free at any point in time tax free in the amount now to well over 5 million. Savings, property etc are not taxed when given up to that amount. Only IRA's are taxed at death but only when taken out and only if they are traditional and not a Roth and then only depending on the beneficiaries tax bracket. If your plan is to give your loved ones your IRA's then the thing to do may be to convert the IRA's to a Roth. Anyone can convert a traditional IRA to a Roth and leave the IRA to a beneficiary tax free.  This 5 year limitation was put in, according to the papers I have read, so that the rich do pay taxes on the IRA's and not be able to do their generation skipping schemes and use other loopholes. The thing to do  now may be to stay within your same tax bracket and convert a part of your IRA every year to a Roth. The IRA's will be tax free for your beneficiaries and you are not under any obligation to take the Roth out in your RMD every year leaving it tax free to your beneficiary. It really isn't costing you anything because you will be paying tax on it anyway but just stay in your same tax bracket and pay taxes with income outside of IRA money.  I believe if you don't currently have any Roth's you may have to wait 5 years from the time you opened your first Roth IRA to take any money out.

Inherited IRA's were recently deemed not the retirement plan of the beneficiary and also can be confiscated in a bankruptcy
2
BradenBraden44 posts since
Apr 27, 2014
Rep Points: 126
5. Saturday, June 28, 2014 - 10:46 AM
#4  Thanks for the information but aren't you missing a basic point of the Roth IRAs?  The reason they are tax free is because I always understood we have to pay taxes ahead of time on the amounts we put in.  I don't think we can just take chunks of money out of a Traditional IRA and just turn it over into a Roth and make it tax free.  I thought Roths are tax free to beneficiaries because the owner already paid taxes on them.  I could be wrong because I have never been interested in Roths.  Thanks for the info.
1
paoli2paoli21,372 posts since
Aug 10, 2011
Rep Points: 6,011
6. Sunday, June 29, 2014 - 4:32 PM
Think you missed this from above.

It really isn't costing you anything because you will be paying tax on it anyway but just stay in your same tax bracket and pay taxes with income outside of IRA money.

You pay the tax. Beneficiary does not. Thought you were interested in saving your beneficiary income taxes when it changes and has to be taken out in 5 years. A Roth is not included (as of now) in your MAGI. 
1
BradenBraden44 posts since
Apr 27, 2014
Rep Points: 126
7. Sunday, June 29, 2014 - 4:47 PM
Yes I do want to help keep the beneficiary from paying taxes on the IRAs but if we pay taxes now, it is going to greatly increase our MAGI since we also have to account for the RMD amount and social security.  I should have taken the time to learn more about Roths years ago but I was inundated with other responsibilities and just overlooked it.  I need to learn more about these Roths and see if it is too late for us to switch some of our Traditional IRAs over.  I just hope it is not too late or will affect our MAGI and be very costly for us now.  Thanks!
1
paoli2paoli21,372 posts since
Aug 10, 2011
Rep Points: 6,011
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