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One of the easiest and most helpful estate-planning tools to use is also the easiest to mess up.
All too often IRA owners commit costly mistakes on their beneficiary form that may leave loved ones out in the cold despite the best intentions.
From failing to update their document after a divorce, to forgetting to name a beneficiary, such financial fumbles can force future generations to surrender too much to Uncle Sam -- or worse, deny them their rightful inheritance.
"It happens more often than you'd think," says CFP professional Joel Larsen, principal with Navion Financial Advisors in Davis, California. "Otherwise capable and intelligent people don't always do proper estate planning because they don't want to address their own mortality."
It would be a terribly romantic story if it weren't a terrible mistake. Years or even decades after a divorce, your ex-spouse could still inherit a portion of your estate if you didn't update the beneficiary form on your IRA.
Forgetting to update estate-planning information following a divorce, death of the beneficiary or remarriage is one of the most common blunders when it comes to beneficiary forms.
Your beneficiary form should be reviewed and updated after every life event, says Neil Brown, CFP professional and CPA with Burkett Financial Services in West Columbia, South Carolina. Updating your will is not enough.
"The IRA beneficiary form overrides your will," says Brown.
Indeed, if you get remarried and change your will, but forget to amend your IRA, the person named on your IRA beneficiary form (most likely your ex) would be legally entitled to your assets when you die -- and, thus, able to pass that money along to any children he or she had from other marriages.
"Retirees can very easily leave their IRA to someone not within their wishes, or leave it to someone within their wishes, but with very negative tax consequences," says Brown, noting many of his clients have insisted that their beneficiary forms are "taken care of" only to discover on closer inspection that their ex-spouse was still named as sole beneficiary.