Many of our clients have significant assets invested in their retirement accounts. Sometimes these accounts were established years ago, requiring little thought as month after month retirement savings went in automatically. Such low maintenance is sort of a good news/bad news piece of the estate planning process– it makes it all too easy to forget how you set those accounts up. But it’s really important to review your accounts periodically to make sure that you’ve designated the right beneficiaries to inherit those accounts.
Regardless of how carefully you’ve structured your Will or Living Trust to manage your assets for those you love, it’s those beneficiary designations that determine who will inherit your retirement assets, not your estate plan. If long ago, you designated your first born to inherit that IRA, then had several more children—guess what? Only that one designated child will inherit those assets, not the rest of your kids. If you’ve spent time and money working with a lawyer to plan your estate so that it won’t pass through probate, then write the wrong thing down on a beneficiary form (or nothing at all), you may very well have to probate your retirement account, despite all of your careful planning.
Whenever you update your estate plan, please take the time to contact your retirement plan administrators and confirm your most current beneficiary designations. And have them send you a copy of those designations that you can place with your other estate planning documents. You want that written confirmation for two reasons: 1) to help your heirs know who you have designated as beneficiaries and 2) to confirm that the company has the proper designations on file–just in case they lose their records in a merger or sale.
Here are some things to know about beneficiary designations for retirement assets:
1. Name your spouse as the primary beneficiary. Your spouse will be able to roll the plan over into their own IRA, and defer required minimum distributions until they are 70 1/2. That’s a huge benefit that only your spouse can get.
2. Name individuals as your secondary beneficiaries if they are adults. If your children are adults, name them as secondary beneficiaries directly–for example 50% to each of your two children, rather than naming your trust. Naming individuals gives each beneficiary maximum flexibility to do what’s called ‘stretch out’ planning — withdrawing the assets slowly, over that person’s estimated lifespan, so that they only have to pay tax on the withdrawals while the balance of the account can continue to grow.
3. Don’t name your estate as a beneficiary. If you write down ‘my estate’ on a beneficiary designation form, you are going to have to transfer those assets via a probate proceeding (if the account exceeds the limit for small estates, which is currently $150,000 in California). That will mean unnecessary time and expense, since if you actually name a beneficiary, the whole account can be transferred without a probate at all.
4. Don’t leave the form blank. If you don’t name a beneficiary at all, you will be subject to that institution’s default rules, which vary. Sometimes, they’ll assume you meant to name your spouse (which is good; sometimes they’ll assume you meant to name your estate (that’s bad). Don’t take the chance, fill in the blanks for them.
5. If you leave your account to minor children, get advice. If you want to name your grandchildren as secondary beneficiaries, or if your children are young, get some advice. You may be able to designate an adult as a custodian for that plan, which would allow an adult to manage the account for your children until they reach the age of twenty-five. It may make sense to name your living trust (if that trust establishes a trust for children) as the secondary beneficiary.
6. Don’t make it too complicated. If you have special plans for your retirement assets, and want to split them up among many people, or want to designate some assets to a trust for the benefit of a certain beneficiary, don’t try to use a company’s form to write that down. If you are doing anything more complicated than designating a few people in equal shares, it probably makes more sense to designate your Living Trust as the beneficiary. This may limit the flexibility the beneficiaries will have in planning their withdrawals, but it may accomplish your ultimate objectives. The Trust can set out your plan for the assets–don’t make a large financial institution serve as your estate planner.