Retirement Account Beneficiary Choices and Your Estate

Retirement Account Beneficiary Choices and Your Estate

Even if you have done all the right estate planning, mistakes with beneficiaries can happen. Just remember this very simple fact: your will does not control your retirement accounts and it may not control any accounts where you have been asked to name the person who inherits the asset, like a life insurance policy.

A designated beneficiary is the person named on a retirement or investment account to inherit the asset if you die. That’s the simple part. What gets complicated is when people don’t think it’s such a big deal, says a recent article “5 Mistakes To Avoid With Retirement Account Beneficiary Selections” from Forbes. Mistakes made about beneficiaries can be costly and sometimes, unfixable. You could accidently disinherit a child or leave money to an ex-spouse.

A will can also push your estate into the probate process which can have some significant pitfalls. If you have a living trust but neglect to fund it, the assets left outside of the trust might also have to go through probate. The best way for most people to pass assets like retirement accounts is to have them go directly to a beneficiary.

Other accounts that pass via beneficiary designation are usually 401(k)s, IRAs, Roth IRAs, life insurance, annuities, and investment accounts that have Transfer on Death (TOD) options. Using beneficiary designations may allow your heirs to receive assets in a tax-efficient and fast manner.

What are the top five mistakes people make for beneficiary designations?

Forgetting to name a beneficiary. This happens very commonly when people are young adults. It’s hard to imagine needing to name an heir when you are young and healthy, but not naming anyone creates headaches.

Ignoring special circumstances. When you have an heir with an addiction problem, one who has trouble managing money or who is preparing to leave a marriage, leaving them a large sum of money can create more problems. If your loved one has special needs and receives benefits from the government, an inheritance could put all their aid at risk. An estate planning attorney can help create a Special Needs Trust and plan for their future.

Using the wrong name. It sounds silly, but it happens often. If your loved one’s name is Jane Doe, or there are family members with very similar names, you’ll need to use more information to identify them, like birthdates, Social Security numbers and even details about their relationship to you. Not providing enough clear information, could send your asset into the wrong hands.

Neglecting to update your beneficiaries. The person you name as your beneficiary when you are in your 30s, may not be the same person you want to inherit your assets in your 60s. If you have remarried, you must change all beneficiary designations to protect your current spouse. If you have had children or additional children since you first purchased a life insurance policy, you’ll need to be sure that all your children are named on that policy. Every few years, just as you need to review your estate plan, you need to update your beneficiaries.

Failing to discuss your beneficiaries with your estate planning attorney, tax, and financial advisor. There are complications that can occur with an inheritance. Being pushed into a higher bracket sounds like a nice problem to have, until the tax bill comes due. Your estate planning attorney will be able to work with you and your loved ones to protect your legacy and their future.

Reference: Forbes (Oct. 25, 2020) “5 Mistakes To Avoid With Retirement Account Beneficiary Selections”