In financial planning, sometimes the simplest and most mundane of tasks can have the biggest impact.

Few places is that more clear than in the process of inheriting and rolling over IRAs, said Sarah Brenner, director of retirement education for Ed Slott and Company, who feels that too many retirement savers and advisors are overlooking the beneficiary designation form.

“The beneficiary designation form is the Rodney Dangerfield of estate planning documents,” in that it gets no respect, said Brenner, who added that advisors should keep in mind that beneficiary forms trump all other estate planning documents. “A beneficiary form is like a piece of paper: It’s free to fill out and people don’t take it seriously. That’s a huge problem. The beneficiary form is what determines how the retirement assets will pass to the next generation.”

A Costly Mistake

Speaking at Ed Slott and Company’s two-day Instant IRA Success workshop in Las Vegas last month, Brenner discussed several horror stories that stemmed from incomplete, lost or poorly completed beneficiary forms.

A USA Today story last month, for example, told of a widow in Las Cruces, N.M., with multiple sclerosis who was left a $1 million pension by her husband. But she couldn’t find her beneficiary form. Since she couldn’t prove that she was intended as the account’s beneficiary, the pension agreed to pay out only what her husband paid into the system, and not the actual pension payments.

“Every client that has a major life event like a birth, death, marriage, divorce, remarriage—every time that the tax laws change, call them and say I want to do a beneficiary form checkup,” said Slott.

In Herring v. Campbell, a 2012 case before the 5th Circuit Court of Appeals, a client’s beloved stepchildren were disinherited because he had failed to update his beneficiary forms. The client had named his spouse as his beneficiary, but his spouse predeceased him by one year and he never updated his form.

When a retirement account beneficiary predeceases the account holder and the beneficiary form is not updated, the standard default rules for account inheritance apply. Courts will consider potential heirs starting with a surviving spouse, then children, then parents, then siblings and finally the estate of the deceased.

In Herring v. Campbell, the courts agreed with the benefit administrators that stepchildren are not considered children for the purposes of determining who will inherit the account’s assets. The administrators decided that the assets should be inherited by the client’s siblings.

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