The turbulent stock market may have taken a toll on your IRA.
Still, there's a good chance that your retirement account holds the lion's share of your savings. You probably want your assets in the tax-deferred account to last long after you die. If your children or other heirs take required minimum distributions based on their life expectancies, perhaps they can stretch the money well into retirement. Maybe even your grandkids could benefit. But a slip-up could unravel your fine intentions. You could end up leaving your IRA assets to your Uncle Louie, while your spouse and kids are left out in the cold. Or your IRA custodian could blow the stretch opportunity for your children by liquidating the account after your death. With adequate planning, you can avoid mistakes that could jeopardize the legacy you want to leave. IRA rules are complex, so consult with an estate-planning lawyer. Catherine Schmidt, an estate-planning lawyer with Patterson Belknap Webb & Tyler, in New York City, says an account holder should reconsider designations if the IRA has grown dramatically over time. Say someone planned years ago to leave most assets to her children from her first marriage, with some money going to her current husband. Back then, her IRA made up 20% of her total assets, so she named her spouse as the beneficiary, leaving the other 80% to her kids. “But after a number of years, the IRA could make up 50% of total assets,” Schmidt says. The account holder could then decide to leave a portion of the IRA to the husband and a portion to the kids. Such a review is particularly important in light of the current economic crisis when your portfolio has likely lost money. Say you specified that $200,000 of your $1 million IRA should go to charity, with the balance going to your child. If your IRA drops in value to $700,000, the charity would still get the promised $200,000, but your child's share would fall to $500,000.
Make sure to also name contingent beneficiaries, who will inherit the IRA if the primary beneficiary dies before the IRA owner. For example, if you named your wife as the primary beneficiary and your daughter as the contingent beneficiary, your daughter will inherit the assets if you and your wife die.