One of the issues I commonly encounter are folks who have several IRAs, sometimes as many as 8 or 9, that they have accumulated over the years. Typically they want me to review and consolidate them into one, easily manageable account. As I go through their files, I discover that several accounts have different beneficiaries. Three may name an ex-spouse, another a deceased father, others may include children, some whom were removed from the will and still others may name their estate as the beneficiary.
Whenever they opened up a new IRA, they named whomever was closest to them at that time as the beneficiary. And when they can't think of anyone to name, the representative at the bank or financial institution may have suggested their estate because their will, would take care of everything. They are usually shocked when I explain what would actually happen to their IRA money when they die. And if you are in a similar position, you may be too.
First of all, your will or trust takes a backseat when it comes to IRAs. The beneficiary-designation form is the ruling authority. So if you've named an ex-spouse, a parent, or anyone that you may have even disinherited in your will, that's who'll receive your assets when you die.
The beauty of the IRA beneficiary-designation form is that it will allow assets to pass to your heirs without going through probate. And just like life insurance proceeds, all your beneficiaries usually have to do is present a death certificate, fill out a few forms, and their check is in the mail. It doesn't get any easier.
If your beneficiaries have predeceased you though, or you didn't name any at all, the assets will become part of your estate. Your heirs will eventually get the money, but they might not be able to take advantage of the
Final Regulations (.pdf) that were approved on April 17, 2002. These rules let the beneficiaries of IRAs take smaller withdraws, therefore stretch out tax payments longer than in the past. In fact, they can stretch the payments out for their lifetimes allowing the bulk of the account continued growth. (Stretch IRAs are designed for investors who will leave some of the money in their IRA to heirs and will not need those funds for their own retirement need. Changes in tax laws, the impact of inflation and other risks could reduce returns) A 42 year old inheriting a hypothetical $300,000 IRA earning a hypothetical 6% annual rate of return would accumulate $1.2 million.
I recommend that you consolidate your IRAs into one account (even 457 plans, 403b accounts, 401ks, etc can be consolidated into an IRA). Then have one beneficiary designation form naming the primary and contingent beneficiaries. Keep this form up to date if your desires change in the future or if any of the beneficiaries pass away.
Consolidation of IRAs can be a very valuable process for the family's benefit.
