Review Your Beneficiary Designations Regularly, Please!

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Review Your Beneficiary Designations Regularly, Please!  (your will does not control who gets your IRA…)

All too often during estate planning engagements, we discover problems with beneficiary designations made for clients’ retirement accounts or life insurance policies.  And, often clients think that their will makes their IRA pass, for example, to their current spouse, when that is not the case.


Thankfully, we can make adjustments during the client’s life that will prevent unintended consequences.  But after death, the result of an improper designation may be impossible to unwind.  It is crucial that you have written confirmation of your named beneficiaries and contingent beneficiaries (keep copies!), and that you review your choices regularly to ensure that they suit your preference and will meet your goals.


Common Mistakes:  Examples of common mistakes in naming a beneficiary are:  leaving an ex-spouse as a named beneficiary, naming a minor child, not naming a backup, or not making a designation at all (the default beneficiary is your estate).


When to Review and Update Your Beneficiary Designations:  We recommend that you review and update your beneficiary designations when you or someone in your immediate family experiences a major life event such as birth, death, marriage, or divorce.  Also, if you roll over a 401(k) or IRA, make sure that you complete new beneficiary designation forms.  Consult with an estate planning attorney to make sure that you make educated choices and have an integrated estate plan.


Making Beneficiary Designation Changes:  The process and required forms to change beneficiary designations differ from account to account to account.  In general, for an IRA, we contact the financial institution that holds the account and request a beneficiary change form.  For a 401K or pension account, adjustments are made through your employer’s human resources department.  And, for insurance policies or annuities, we contact the issuing company to obtain a beneficiary change form.  It is important that you have a thorough understanding of how changes that you make affect the ultimate distribution of assets, so we recommend that you have professional advice to ensure that you choose the best option to suit your preference of to whom, how, and when the assets will be distributed to chosen beneficiaries.


Stretch IRA Opportunity:  Stretching out the benefits of an IRA can turn a modest IRA into millions for your beneficiary.  Payments that are made over the lifetime of a younger beneficiary allow the IRA to grow tax deferred for a longer period of time.  A $100,000 IRA passing to a 30 year old child could grow in value to over $1,000,000 for his retirement.  However, IRS statistics show that 90% of IRAs are cashed out by the beneficiary within six months of death.  You can prevent this million-dollar retirement benefit for that child from becoming a Mercedes today instead by naming a specially-drafted trust as the beneficiary of your IRA.


Conclusion:  You have worked hard to acquire assets—your home, investments, and prized possessions—and to provide a level of financial stability for your family.  Don’t make mistakes that will thwart your estate plan.  Make sure that you understand to whom, how, and when each asset will flow.




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