According to the stats, you probably funded your Individual Retirement Account (IRA) at the last moment this month (assuming you fund them at all). If we tend to procrastinate about saving, then we also probably put off estate planning. One of the simplest aspects of estate planning is to designate beneficiaries of your IRA.
I am not an estate-planning attorney, but here are some tidbits I picked up from various sources including a review copy of new book The Overtaxed Investor by Phil DeMuth.
Why is this important?
- The person, trust, charity, or estate that you pick as your beneficiary overrides any will. So if your sole IRA beneficiary is set up as your ex-spouse, and your will says everything goes to your current spouse, then your ex-spouse will still get your IRA (at least without a long legal battle).
- If you name an individual instead of an estate, the inheritor can space out withdrawals over their (actuarial) lifetimes, prolonging the tax-deferred growth benefits of IRAs. A trust or estate does not get this feature by default (a trust may be carefully constructed to preserve some of these characteristics).
- You may still want to pick a trust if you have sizable assets and are leaving them to young children. You can then outline rules and a trustee to manage how the money is spent. This route involves extra costs, however.
- Secondary beneficiaries can also be chosen. If no secondary beneficiaries are named, your assets may pass to your estate – exposing them to the probate process, estate expenses, and creditor claims. In many cases, people pick their spouses as primary and their children as secondary.
How should you do it?
- Contact your IRA custodian. I use Vanguard, and you can either fill out this paperwork kit or do it all online under Account Maintenance > Beneficiaries. They use some language to simplify the process. For example, I set my primary beneficiary as the “person I am married to at the time of my death” and my secondary beneficiary as “To my descendants who survive me, per stirpes”. I may change this later. Find out what per stirpes means and more with this Vanguard guide.
- Keep a physical copy in your personal files. Keep copes in your home safe, safety deposit box, and/or digital safe.
- Tell your beneficiaries where the form is and what is on it. Vanguard won’t contact anyone upon your death, so it is up to your beneficiaries to contact Vanguard. I suspect many other brokerages operate in a similar manner. There are millions of dollars in unclaimed IRAs every year.