VOICES FROM THE INDUSTRY: Annual reviews can help prevent financial horror stories

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Sharing stories of success are always a lot more fun for me than horror stories. Nevertheless, much like staring at an accident on the side of the road, most people can’t help but find them more interesting.

Of course, you have recently completed your annual review with your
financial professional. If not, schedule one as soon as you complete reading your IBJ.

Here are two stories to illustrate why it is important.

A near-miss

The first story goes like this: A new client had been employed at the same firm for more than 15 years. While conducting a standard preliminary comprehensive review, it became apparent that something about his beneficiary forms needed to be addressed.

His previous wife was still listed as the
beneficiary on his 401(k) retirement plan as well as the life insurance policies provided by his employer.

His previous marriage had lasted two very long and bitter years, to hear him tell it, and they had no children. His current marriage of 12 years blessed him with three wonderful children and a wife he absolutely adored. You might be assuming those beneficiaries should be changed at a convenient time. They should have been changed 12 years ago.

This particular client, like most professionals, was very busy. It is always easier to put small stuff like this on the back burner. After all, he was going on a trip with his buddies from college and asked if he could handle it when he returned. That would have been the easiest thing to do.

Instead, after much insistence and hand-delivery, he signed the new forms right away.

You probably have guessed it by now, but this client didn’t make it back from his trip. A tragic situation could have been even worse.

Instead of his previous wife getting his retirement savings and some life insurance, the people he specially wanted to be taken care of financially, were the beneficiaries. His wife and three children, although are not completely set for life. will not have to worry about financial needs for some time. A complete disaster was narrowly avoided.

IRA strategy

The second story doesn’t have the best of endings, either, but it’s better than what could have happened.

A client’s father was in ailing health for some time. The client’s brother held the power of attorney concerning the financial matters of the father since the mother had already passed away.

About three years ago, the brother had the father move all of his investment accounts to the adviser used by the brother to keep a better eye on them. In this particular situation, it seemed like a smart thing to do.

The first mishap was that while opening the accounts the beneficiary form for the individual retirement account was left empty. This isn’t uncommon because people often believe they’ll go back and add beneficiaries later. If not, then the estate becomes the default heir.

The father passed away recently and the three kids were to split the IRA equally while a portion of the estate and trusts went to the five grandchildren.

Now this is not the place to educate you about a “stretch IRA,” but let me say the three kids could have stretched the IRA inheritance in annual payments over their own life expectancy, letting them take advantage of tax deferral for about another 30 years.

Of course the beneficiary form, which still left blank the beneficiary, did not allow for the stretch IRA option to be used. A review could have caught this oversight.

Then, this same financial adviser almost made another costly mistake. He wanted to sell everything in the father’s IRA and send a check to each of the beneficiaries. Sounds logical enough, but doing so does not let you consider taking advantage of the five-year rule, which allows heirs to open an inherited IRA and take distributions over the next five years.

After losing the 25 years of tax deferral from the stretch, our client was told not to accept a check, but to allow a trustee-totrustee transfer-the only method of transfer the IRS will allow to take advantage of the five-year rule or stretch IRA.

This method allowed the taxes on the inherited IRA to be paid over five years instead of all in one lump sum. That was a significant tax benefit for the client.

These two stories could have both been a lot worse. The reviews helped save more than $2 million. An additional $1.1 million could have been saved if the second case had been handled properly at the front end.

Please, check your beneficiary designation forms or the accounts in which you might be the beneficiary of during this year’s annual review.

It is a simple process. Take care of it today. You don’t know if it’s the day it will be needed.

Coan is managing partner with Wealth Planning & Management LLC a fee-only registered investment adviser, and author of “Asset Protection and Wealth Preservation.” Views expressed here are the writer’s.

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