After being diagnosed with cancer, Leonard Smith created a plan with the counsel of advisors that would transfer his wealth to his children. Smith completed IRA beneficiary designation forms. However, instead of listing the individual names of the children or designating his estate as a beneficiary, he simply stated that the retirement accounts should be divided according to his Will. His Will was updated to reflect his children. However, since no actual beneficiaries were named on the beneficiary designation form, the form was deemed to be invalid.
The designation form mistake was not discovered until a year after Smith passed away. Before he died he believed his estate plan reflected his wishes to pass accounts to his children. Smith got married two months before he passed away. The invalidated forms meant the accounts transferred by default to his widow.
It remains to be seen why the mistake was not corrected before Smith passed away. An advisor may have failed to review the forms or been provided poor counsel, or Smith may have simply failed to seek or follow the advice of an estate planning attorney. In addition to reviewing documents with an attorney, to prevent an invalidated designation form:
1. Name individuals or an IRA beneficiary trust on designation forms and do not designate distribution under the terms of a Will. (IRA beneficiary trusts are asset protection tools that offer account owners more control over how beneficiaries will use retirement accounts, creditor protection, and protection from spendthrifts.)
2. Update forms if the account owner relocates, marries, or divorces. Another state’s laws may not preserve one’s wishes the same way.
3. Ask for new forms if a bank changes names. A simple bank merger could invalidate old forms.
When forms are executed properly, beneficiaries of retirement accounts in North Carolina enjoy state-specific benefits. Last year North Carolina implemented a law that increases creditor protection for IRAs. Not only are retirement accounts protected from creditors while the account owner is alive, but now also in hands of beneficiaries after the death of the original account owner. However, proposed laws affecting inherited IRAs may prompt individuals to use alternative tools for preserving wealth for beneficiaries.