Beneficiary Designations: IRAs, 401(k)s, Life Insurance, etc.
Many people periodically update their wills or other estate plans, but don't update who will receive distributions from their retirement plans (such as IRAs and 401(k)s) upon their deaths. Every year you should review your entire estate plan, and the review should include life insurance and retirement plan "beneficiary designations" to make sure they aren't outdated. The following are some tips for naming a retirement plan beneficiary:
Tips for Naming Retirement Plan Beneficiary
It is important to name a beneficiary. Do not assume that your retirement plan will be distributed according to your will. If you don't name a beneficiary, the distribution of benefits may be controlled by state or federal law or according to your particular retirement plan. Some retirement plans automatically distribute money to a spouse or children. While others may leave it to the retirement plan holder's estate, this could have negative tax consequences. The only way to control where the money goes is to name a beneficiary.
Naming Trust as Retirement Plan Beneficiary Can Avoid Tax Consequences
You may want to designate a trust as your beneficiary. If your estate is more than the current estate tax exclusion ($11.4 million for 2019) and a large portion of it consists of retirement plans, it may make sense to direct that the retirement plans be payable to a trust rather than to the surviving spouse. The trust must be properly drafted to avoid tax consequences, so consult with your local estate planning and elder law attorney, Joseph Motta, before doing this. If you want your money to go into a trust for your children, be sure to designate the trust as the beneficiary. If you name your children, the money will go directly to them.
Life Changes Can Be Reminders for a Beneficiary Change
If you have major life changes, be sure to keep your retirement plan updated. If you get married or have children, you may want to change your beneficiary. Also, if your spouse was your beneficiary and you get divorced, your former spouse will still be the beneficiary -- divorce does not automatically remove an ex-spouse as beneficiary. If you wish to remove a former spouse from the plan, you will have to fill out a new beneficiary designation form.
Review Your Beneficiary Designations Periodically
Even if you don't have big changes, you should review your beneficiary designation periodically. Your beneficiary may not be who you remembered it to be or it may be outdated. For example, if you named a charity as beneficiary, you will want to make sure the charity still exists. A Change of Beneficiary form can often be downloaded from the web site of the firm holding the retirement plan assets.
There are many considerations involved when planning your estate. To make sure your assets are being distributed to the right beneficiaries in your circumstance, give us a call at 440-930-2826 to schedule a free consultation. We enjoy putting to use our knowledge and expertise to provide you with the best advice on how to protect the ones you love.
