By Michael Ham
Thank you Ed Slott for your tireless work in educating us on IRAs, their benefits and their near misses. But for the agents and reps who don’t want to spend three days and several thousand dollars in a workshop, here is the key to making you an invaluable IRA resource for your clients and prospects. Share the stories of unaware families who thought their parent’s or spouse’s IRA would automatically pass tax free to their IRA, because they don’t.
My most recent experience with a new client is just another nightmare whereby the wife figured her deceased husband and their estate attorney had all the details worked out in their IRAs. And I suppose their plan was copacetic back in 1999 when it was drafted. But news flash! The custodian (aka banks and brokerages) have gone through tumultuous times and there have been untold numbers of mergers and sales of banks, insurers and firms over the past few years, often unintentionally negating prior estate planning.
In this case, the firm that was once the custodian of my new client’s IRA was acquired. And even though their IRAs held by the acquired firm named the spouses as each other’s beneficiaries, the firm’s custodian was the owner “for the benefit of” (FBO) the clients.
OK, still no problem except that the beneficiary of the annuities owned “inside” the IRAs was named (per the custodian’s requirements) as “Same as Owner.” Is that a big deal, you may ask? Heck, yes! When the prior firm was sold, the annuity contracts’ ownership was transferred back to the clients. Thus the beneficiary wasn’t changed and still named the owner, not the spouse nor any other contingent beneficiaries. The result? The deceased husband’s estate became the beneficiary, which nullified any opportunity for the wife to “inherit” or simply roll over his IRA into hers. And income taxes were due now on a very large IRA that could have and would have been deferred for at least 10 years.
Having to pay income taxes on her spouse’s IRA now and being unable to inherit it into her IRA reduced the principal of the account by 33 percent. Her lifetime annual income was also cut from $30,000 to $20,000. This is so easily avoided by simply naming both a real human being primary beneficiary along with multiple human contingent beneficiaries. Sharing these types of real life stories with your clients and prospects will increase your value and your odds of uncovering assets held under management with inept competitors.
You’ll be shocked to learn how many IRAs held at banks and other firms name the beneficiary as “per stirpes,” or often a revocable trust. Without actually naming beneficiaries “with a heartbeat,” the IRA is forced back through the probate process and becomes part of the deceased estate. This costs money in legal fees and negates the ironclad protection against predators and creditors afforded to IRAs and their beneficiaries. Your call to action as a skilled professional is to offer all your clients and prospects the information and ability to review their IRA beneficiaries. Hey, I wonder if I can get my own PBS show?