In an interview for the Stamford Advocate, estate planning attorney, Gary Altman, shares some common issues with the handling of IRA/401K distributions are the death of the owner:
- Some custodians do not tell beneficiaries what their obligations are with inherited IRAs. In other words, they are not reminded of what their minimum distribution is.
- Some beneficiaries do not know what they have to do, so they do not take out enough or any.
- If/when beneficiaries fail to take out enough, there is a 50% penalty on the amount that should have taken out, but didn’t. It is sometimes possible to get the IRS to waive this penalty, but this is a cumbersome process and should be avoided if at all possible.
- Clients do not change the beneficiaries of their IRAs/401k plans to reflect changes in life. Many times ex-spouses or girlfriends or dead parents are listed as beneficiaries, not current spouses or children.
- Sometimes, minor children are named, thereby causing problems because minors cannot inherit directly. They need a legal guardian and court supervision.
- Custodians are just that, they should not give advice, but clients sometimes rely on what the person on the phone tells them, which may or may not be correct.
- 401k plans and other qualified plans should be the same as an IRA, unless the plan has different rules.