Thursday, January 04, 2007

Retirement Accounts and Beneficiary Designations - Myths and Misconceptions

Category: Estate Planning, Tax Law and Planning

At the start of the new year, many people take a look at their qualified retirement plans (IRA, 401(k), etc.) as they plan savings goals for the new year. But what if you aren't the one getting the benefits, because you have died? How are the benefits getting to your family? Below is a list of some Myths and Misconceptions about Retirement Plan benefits (which can also be thought of a as a list of what NOT to do).

  1. My Retirement Plan is distributed the same as my Will. WRONG! Your Retirement Plan is distributed according the Beneficiary Designation you complete for each Retirement Plan.

  2. If I don't name a Beneficiary, my Retirement Plan will be distributed to my Estate. MAYBE. Some Retirement Plans say that if there is no beneficiary, it will pass to your Estate. Others give a list of people who will receive the plan in order of priority (spouse, children, etc.). However, if a Retirement Plan is payable to your Estate, there are negative income tax consequences (remember - you haven't paid any income taxes on these assets yet) that are best avoided. Also, for domestic partners or similar, there are never any default provisions for payment to the surviving partner - a Beneficiary Form must be completed.

  3. If my spouse is named as Beneficiary and we are divorced, she is automatically no longer the Beneficiary. WRONG! Unless you act to change your Beneficiary Designation, your ex-spouse is still your primary beneficiary - not a situation you want to be looking down on from the great beyond. File the Change of Beneficiary when you file for separation.

  4. If my minor children are named as Beneficiaries, and I created a trust for them in my Will, then the Retirement Plan will be distributed subject to those trust terms. WRONG! Unless you name the trust created for your children as the Beneficiary of the Retirement Plan, your darling angels will get access to all the Retirement Plan funds at the mature age of 18 (or 21).

  5. I know who are my Designated Beneficiaries. MAYBE. Many times a person thought they filed out a Beneficiary Designation, but didn't, or thought they named Contingent Beneficiaries, but didn't, or thought they named a trust for this children, but didn't. You should check or change your Beneficiaries today. A Change of Beneficiary form can usually be downloaded right from the website holding the assets.

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At 3/12/2007 11:48 AM, Anonymous Anonymous said...

Beneficiary option "Per Stirpes" should be explained. Fidelity's form has this as a check box. Also talk about disclaiming an inherited IRA or 401K in favor of your children.

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At 4/25/2008 10:24 PM, Anonymous Anonymous said...

I would like to name as beneficiary the trust set up under my will for the benefit of my minor children (so that the money will not go to them outright at age 18). However, the insurance company says I cannot name a testamentary trust as a beneficiary. Any suggestions?

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