Beneficiary Designations: The Most Overlooked Area in Estate Planning
How have you named beneficiaries on your retirement accounts like 401k, 403b, IRA, etc? Beneficiary designations on retirement accounts supersede anything that is listed in a Last Will and Testament.
Beneficiary designations create some opportunities and some challenges. The opportunity is when you name a beneficiary, you bypass probate on those accounts. The main challenge is that your Will is multiple pages and allows for very specific instructions and legal language when it comes to your estate.
However, the beneficiary designation box on a retirement account is one single line meant only for a name, and then a secondary beneficiary. That little box on that form has total control over how that account is passed on to your heirs.
For many people, the total of their retirement accounts is their first or second largest asset next to their home. Yet, you have this little box on a form that is completely governing what happens when you pass away. Some issues that can arise are:
- What happens if your designations don’t pass in the typical order?
- What if there is a minor child listed as a beneficiary?
- What if one child wants to do one thing and another child wants to do something completely different with the retirement accounts, i.e. cashing in the entire account upon death?
Another big thing to remember is the taxation on retirement accounts (except for Roth IRAs) which happens when the money is withdrawn. Your estate doesn’t pay the taxes; the beneficiaries of those accounts will pay the taxes upon withdrawal. No one wants to leave a huge tax burden to their beneficiaries or heirs.
Beneficiary designations for retirement accounts sometimes get overlooked when you are estate planning. Check out our Beneficiary Checklist. It is a great resource to make sure your beneficiary designations reflect your wishes.