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Probate Horror Story #12: IRA Beneficiaries

Welcome to the 12th in a series of Probate Horror Stories, courtesy of The Brown Law Firm, LLC. Last month our topic covered what could happen if you use certain wording in your will that leaves part of your estate to unworthy beneficiaries. This month we are discussing the best way to set up your IRA beneficiaries.

Fictional Situation: Jonesy

  • 57-year-old widower
  • 2 adult children
  • Has an updated will
  • Has credit card debt and an upside-down mortgage
  • Set up an individual retirement account (IRA)

Jonsey had not made the best financial decisions over the course of his life. Despite his poor choices, he did manage to set up an IRA and had created a will to help protect some of his assets.

Unfortunately, Jonsey designated that his estate be the beneficiary of his IRA. While this may sound like a logical move, it actually backfired for his family after his death. Because Jonsey had major credit card debt and an upside-down mortgage in Colorado, during the probate process his creditors were able to pursue their claims by using all of the money Jonsey had in his IRA. His family did not benefit from any of the IRA savings he worked so hard to accumulate.  There were also adverse tax consequences which were triggered by Jonsey naming his Estate as the beneficiary of the IRA.

What Jonesy should have done was to designate one or more individuals as the beneficiary of his IRA. For example, by naming his 2 adult children as equal beneficiaries of his IRA, the money in this account would go directly to his children free and clear. The children would then have several options: keep the IRA as an investment (and stretch their minimum distributions over their lifetimes), liquidate the IRA entirely and pay hefty taxes on those earnings or liquidate the IRA slowly over a 5-year period and pay the appropriate taxes little by little each year.

Because of his debt, Jonesy’s estate will be responsible for paying off creditors. At least his children would have been able to inherit his IRA savings even if they were not able to recoup his full estate if they had been listed as beneficiaries of that IRA.

If you are unsure of the specific ways to protect your estate in Colorado – and your family – in your estate planning documents, contact the Denver will lawyers at The Brown Law Firm, LLC. A little pre-planning will go a long way to preventing a probate horror story for your family. Contact us at (303) 339-3750 or send us a message online to learn more about how we can help.

Watch for our blog next month for the next installment in our Probate Horror Story Series.