Summary

One of the easiest parts of an estate plan to overlook can also create some of the biggest headaches for your loved ones.

Many people assume their IRA will automatically pass according to their wishes. But if no beneficiary is listed—or the designation is outdated—the account often becomes part of the probate estate instead. That can make administration more complicated, create delays, and leave your family dealing with unnecessary paperwork and expenses.

A recent IRS private letter ruling confirmed that, even when a probate estate becomes the beneficiary of an IRA, the account can often still be divided into separate inherited IRAs for the beneficiaries which allows better tax treatment. That’s certainly good news, but it also highlights a much bigger lesson: it’s far better to avoid the problem in the first place.

Why This Matters

Beneficiary designations control who receives most retirement accounts. Your will or trust does not override them.

In the case reviewed by the IRS, a father died without naming a beneficiary for his IRA. Because there was no designation on file, the IRA was payable to his estate. His three children ultimately received their shares, but only after the executor had to navigate additional legal and administrative steps that could have been avoided with a simple beneficiary form.

The IRS confirmed that the inherited IRA could be divided into three separate inherited IRAs without creating an immediate tax problem. Each child could then continue taking required distributions under the applicable rules.

While that outcome worked out well, it wasn’t simple. The family needed IRS guidance because some financial institutions are reluctant to process these transfers without additional legal authority. That can mean delays, extra expense, and frustration during an already difficult time.

This is exactly why we encourage clients to review beneficiary designations regularly. Life changes. People marry, divorce, have children, lose loved ones, or simply forget forms they completed many years ago.  Also, banks and financial institutions merge, leaving gaps in paperwork and beneficiary designations.

We’ve also seen situations where clients carefully update their trust or will but never realize that an old beneficiary designation still controls a retirement account. Unfortunately, the retirement account usually wins.

A properly coordinated estate plan isn’t just about having the right legal plan. It also means making sure your retirement accounts, life insurance, and other assets all work together the way you intend.

Simple Lesson

Your estate plan is only as strong as the beneficiary designations that support it. Spending a few minutes reviewing them today can spare your loved ones significant time, expense, and confusion later.

Action Step

Pull out your most recent IRA and retirement account statements. Confirm that every account has the correct primary and contingent beneficiaries listed. If you haven’t reviewed them in several years—or you’ve experienced a major life change—now is an excellent time for a review.

If you’d like help reviewing your plan, call (517) 548-7400 or connect with us here: https://www.michiganestateplans.com/contact-us