John Jeffreys died leaving no children or wife. His brother was the recipient of his estate in carefully crafted estate planning documents. Then the financial advisors helping John’s brother, Jason, settle the estate came upon an unexpected hurdle.

John had never filled out the beneficiary designation section for his very fat IRA plan valued at $800,000. Jason is now in a mess with the custodian to see if anything can be done about this. The quick answer is “probably not.” Now instead of distributing assets of John’s IRA over Jason’s life expectancy of approximately 25 more years, he must pay Federal and state income tax on the inheritance over five years. If Jason had received the IRA as a beneficiary, a provision in the tax code would have made it possible for Jason to open an “Inherited IRA” and leave the money invested tax-deferred until he had to begin taking distributions at 70 and ½.

The best guess is that John opened a retail brokerage account at a branch of a large company. That the selling broker did not require beneficiary designations to be added at the time of the application process may have happened from inexperience or neglect. It’s hard to say.

Jason did not want to start taking distributions while he is in full career mode, but he must. With each distribution, he loses ground on the growth potential of his brother’s IRA. Jason is consulting with his accountant about the best way to pay the tax – each year for five years, or wait until 2013 and pay it in one lump sum. The answer is a function of Jason’s tax bracket and the anticipated return on investment if the full amount is left untouched until 2013.

Bottom line, everyone should check the beneficiary designations on every possible financial account they have. Whether it is a taxable investment account, a pension plan or 401(k), or savings and checking accounts, the importance of getting the right beneficiaries on the right documents cannot be overstated.