The beneficiaries you select for your retirement accounts can have a significant impact on the financial future of your family and/or other heirs. That’s why proper designation and regular review of your account beneficiaries are essential to ensuring that what remains in your accounts after you pass on goes exactly where you want it to. All too often, improper designation or failure to update account beneficiaries leads to unnecessary delays, taxes, legal battles or the money simply not going where it was intended.
When naming the beneficiaries for your 401(k), 403(b), IRA or other qualified retirement accounts, you should always designate both primary and contingent (secondary) beneficiaries. Your primary beneficiaries are the first in line to receive your account assets upon your death. Your contingent beneficiaries are those who will receive your assets in the event that all of your primary beneficiaries die before you do. If you have multiple beneficiaries and want each to receive a specific share of your remaining assets, then you should also designate the percentage each beneficiary is to receive. If you fail to designate a percentage, then each of your beneficiaries will receive an equal share.
You should also always identify your beneficiaries by their complete name rather than by classifications such as “my spouse” or “all of my children” and should always include each beneficiary’s Social Security Number or taxpayer identification number (when naming a trust, custodian or other non-person beneficiary). Failure to include Social Security and/or taxpayer identification numbers can result in unnecessary delays in the distributions made to your beneficiaries as attempts to confirm their identities are made. If one of your primary beneficiaries dies before you, then the deceased beneficiary’s share will be split among the remaining primary or secondary beneficiaries. If all of your beneficiaries die before you do, or you fail to name a beneficiary, your account assets will be distributed to your spouse (if living) or to your estate.
Designating Your Spouse
For 401(k) and other plans subject to the Employee Retirement Income Security Act (ERISA), federal law requires that a spouse is the automatic sole beneficiary of your account unless your spouse waives his/her right in writing. For IRAs, non-ERISA 403(b) plans and other retirement plans not subject to ERISA, you may name anyone you wish as your account beneficiary. However, if you live in one of the nine current community property states, your spouse has a right to 50% of your account assets that were accumulated during the course of your marriage, even if he or she is not a designated beneficiary for your account(s).
Designating Your Children
When designating your children, it’s especially important to list them by name and include their Social Security Number. Using a general classification such as “all of my children” can result in considerable delays and frustration as all eligible beneficiaries are verified. When designating a daughter, including a Social Security Number is particularly important as her surname may change upon marriage. In such an instance, the married daughter would have to prove that she is the same person designated as the beneficiary. If you are designating a minor child, also keep in mind that if you become divorced the assets may end up in the hands of the minor child’s guardian, which may be your former spouse. In this instance, you may want to name a trustee or custodian rather than the minor child.
Designating a Trust, Will, Estate or Custodian
The beneficiary designation you make for your qualified retirement account always supersedes a will or trust. This means that if the trust or will contains provisions for the distribution of your account assets and you have named someone other than the trust or will as your beneficiary, then the named beneficiaries will receive the assets and the provisions of the will or trust will be ignored. So if you want the assets to be distributed according to a trust or will, be sure to name the trust or will as the beneficiary of your account.
If you are married, be careful about naming a trust as the beneficiary. If your spouse is not the sole beneficiary of the trust, naming the trust can result in your spouse losing the right to have your account rolled over to his or her own IRA where its distribution can be controlled and the account can maintain its tax-deferred status.
By naming a trustee or custodian as your beneficiary, you can control the payment of distributions made to minors or irresponsible children. Otherwise, they will control the distribution of the assets. The same problem can arise if you name your estate as beneficiary.
Keep a Separate List
It’s always a good idea to keep an updated list of your beneficiaries that will be available to your family members or attorney upon your death. By law, plan administrators, custodians and insurers cannot disclose the names of your account beneficiaries to anyone but you or your beneficiaries and are under no obligation to contact your beneficiaries. It is up to the beneficiaries themselves to make a claim.
Review Your Beneficiaries
As part of your overall retirement strategy, you should review your beneficiaries on a periodic basis and make adjustments as needed. Life events such as marriage, divorce, childbirth or the death of a selected beneficiary can all warrant a change.
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