Estate attorney Bill Dendy, president of Elite Financial Management in Dallas, advises clients to check first with the custodian or insurance company to see if they offer "restrictive beneficiary endorsements" on their IRA or annuity products.
Such endorsements provide "earnings only" to beneficiaries on an annual basis, which preserves the principal.
"This is simple and low-cost compared to a trust," says Dendy.
Forgetting to name a guardian
Parents who wish to leave their IRA to an underage child also frequently forget to select a guardian, with potentially disastrous effects.
If you die before your child reaches adulthood, the court will appoint a guardian for you to oversee those assets until he or she reaches the age of majority. It might not be the person you would choose.
"Naming a minor child is a problem," says Larsen. "If you are divorced, guess who the courts will name? The estranged spouse."
When choosing a minor child as a beneficiary, he notes, consider how you want that money controlled and select your own trustee or guardian.
The form is MIA
You did everything right: named a beneficiary, kept your forms current and created a trust to rein in reckless spending. But you didn't tell your loved ones where to find the paperwork.
Even the most bulletproof beneficiary form won't help your heirs if they can't track it down after you pass away.
And don't assume that your bank or brokerage firm has a copy. Amid the flurry of mergers and acquisitions in the financial services industry, there's no guarantee they'll be able to produce the document when it matters most. Better to retain your own record, says Larsen.
Without an IRA beneficiary form, the courts have no choice but to subject your heirs to the faster payout schedule, causing them to miss out on the tax-deferred stretch IRA.
Get a copy of your beneficiary form from your IRA custodian, keep it in a secure location (fireproof safe at home, deposit box at the bank or scanned file) and tell your beneficiaries where it is.
This is also a good time to review your wishes for the account -- explaining to your children and grandchildren how you'd like their inheritance used, and the benefits of stretching out their distributions versus liquidating the account, says Brown.
To prevent other unforeseen mishaps, have your IRA beneficiary form reviewed by a professional to be sure it reflects your wishes and adheres to federal and state law. If you live in a community property state, for example, you can't name someone other than your spouse as a primary beneficiary without obtaining a notarized release from the spouse.
"So often people don't go back and look at their financial paperwork," says Larsen. "Financial planning is not an event. It's a process."