Are your beneficiary designations for your retirement accounts up-to-date? How we pass on our retirement accounts is the most overlooked area in estate planning today.
First, let’s talk about wealth transfer 101. For many, retirement accounts are typically the largest or second largest asset outside your house. You have to realize that if you have a living beneficiary named on the beneficiary designation for those accounts, the will has no legal authority over who gets what. None. It doesn’t matter what you put in the will.
That little box on the beneficiary form has full legal control and authority over who gets what. Yet, there’s hardly any room for information. You usually just have a little box. You don’t give it a second thought, maybe you name your spouse if you’re married, your kids as contingent.
It does create opportunities because when you name a beneficiary, the asset bypasses probate. A death certificate is produced and it goes immediately to the beneficiaries. But it also can create problems.
How much legal language is there in a will, for example? A will is usually eight to 10 pages. The legalese is in there for very important reasons. It covers a lot of different things. You don’t really have space for all that legal language in a beneficiary designation, so it creates potential problems.
Do you have a copy of your beneficiary designation? Does the company you have your money with, your IRA or 401k company or if you have life insurance, do they have a copy of your beneficiary designation?
If you did it 20, 25, 30 years ago when you created your 401k and its changed hands from this company to that company, or you have an IRA and it was merged and bought, do they actually have a copy and do you have a copy as a backup? Does it consider changes in state and federal tax laws? And have you considered recent life events that could change your beneficiary elections like adoption, beneficiaries you may want to eliminate, additional births of children and grandchildren, death, divorce, marriages, all those kinds of things.
It’s not as simple as filling in a box, so I have published a Beneficiary Checklist that covers 14 things you need to check.
We’re going to be visiting this over the next few weeks and talking about eventually making sure your IRA tax time bomb doesn’t go off when you die. A lot of that is how you name beneficiaries.