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Choosing Retirement Account Beneficiaries Requires Some Thought

May 07, 2018 11:16AM ● By Jeffrey Hall

Jeffrey S. Hall, MBA, CPA, Esq.

By Jeffrey Hall, CPA, JD

While the execution of wills requires formalities like witnesses and a notary, the reality is that most property passes to heirs through other, less formal means.

Many bank and investments accounts, as well as real estate, have joint owners who take ownership automatically at the death of the primary owner. Other banks and investment companies offer “pay on death” accounts that permit owners to name the person or people who will receive them when the owners die.

All of these types of ownership and beneficiary designations permit these accounts and types of property to avoid probate, meaning that they will not be governed by the terms of a will. It's not unusual for a will to direct that an estate be equally divided among the decedent's children, but to find that because of joint accounts or beneficiary designations the estate is distributed totally unequally, or even to non-family members, such as new boyfriends and girlfriends.

It's also important to review beneficiary designations every few years to make sure that they are still correct.

These concerns are heightened when dealing with retirement plans, whether IRAs, SEPs or 401(k) plans, because the choice of beneficiary can have significant tax implications. These types of retirement plans benefit from deferred taxation in that the income deposited into them as well as the earnings on the investments are not taxed until the funds are withdrawn.

Following are some of the rules and concerns when designating retirement account beneficiaries:

  • Name your spouse, usually. Surviving husbands and wives may roll over retirement plans inherited from their spouses into their own plans.
  • But not always. There are a few reasons you might not want to name your spouse, including the following:
    • He or she is incapacitated and can't manage the account,
    • You are in a second marriage and want the investments to benefit your first family, or
    • Your children need the money more than your spouse.
  • Consider a trust. In a number of the above circumstances, a trust can solve the problem, providing for management in the case of an incapacitated spouse, permitting assets to benefit a surviving spouse while being preserved for the next generation.
  • Keep copies of your beneficiary designation forms. Don't count on your retirement plan administrator to maintain records of your beneficiary designations.
  • But name beneficiaries! The biggest mistake many people make is not to name beneficiaries at all, or they end up in this position by not updating their plan after the originally-named beneficiary passes away. This means that the plan will have to go through probate at some expense and delay and that the funds will have to be withdrawn and taxes paid within five years of the owner’s death.

In short, a comprehensive estate plan needs to include consideration of beneficiary designations, especially those for retirement plans. For further information on beneficiary designations, visit Elder Law Attorney Jeffrey Hall’s website at www.HallLawGroup.com or call 925-230-9002 for a free 15-minute consultation. 

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