During my years as a Wealth Manager, I’ve reviewed many beneficiary forms for 401ks, IRAs and life insurance policies. It’s unusually common that even the smartest or wealthiest people make very basic… but very costly mistakes when it comes to this basic task.
It’s usually because they are so busy or complacent or have an attitude that everything will work itself out just fine. If you think about it, it’s usually just one line on a very busy form… no “red letters” or highlighting saying:
HEY! DO THIS RIGHT OR THERE MAY BE BIG PROBLEMS!
Nope. It’s just one more line on a form with lots of lines or questions. It’s no wonder I find so many problems when it comes to this issue.
When it comes to beneficiaries you should never just jot down the first thing that comes to mind when you get to that part of the form… and if you already have your 401k, IRA or life insurance in place… you NEED to review what you have listed for your beneficiary.
Here’s a short list of things you need to check on regarding your beneficiaries
This is by no means the complete list, please come to see me so we can do a thorough examination of your beneficiaries… but this will give you an idea of some of the things you need to consider:
· Is your estate named as your beneficiary? If so, you have just negated one of the huge benefits that retirement accounts offer—bypassing probate. If you name your estate as beneficiary, your assets will have to go through probate unnecessarily.
· Do you want to give your children the right to take the money out in a lump sum and pay taxes at your (and/or your spouse’s) death? Or, would you like them to stretch out their withdrawals so that their tax bill will be significantly lower?
· Do you want your grandchildren (or future grandchildren) to inherit their parents (your child’s) share if their parent should precede them in death? Or, do you want it to go to your child’s spouse (their other parent)?
· Is your 401k or IRA valued less than $250,000? If it is you are allowed to be very specific in your beneficiary language to make sure your life’s saving is dealt with in the exact manner you desire. Make sure you are detailed and have thought about exactly what you want to happen or that you have sat down with your advisor and have come up with a plan that fits your desires.
· Is your 401k or IRA over $250,000? You should discuss the benefits of an IRA Dynasty trust. This vehicle will create “pass-through” language that will allow the main trust to divide into separate subtrusts for each beneficiary. In this manner, each beneficiary will be allowed to maximize their tax management of their inheritance much more effectively… conceivably saving them tens or even hundreds of thousands of dollars in taxes.
I could go on to describe even more problems or possibilities when it comes to your beneficiaries… but hopefully you get the point.
Just jotting down a name or two on the beneficiary blank on your retirement account form is NOT the way you want to treat probably the largest asset you have outside of your home. You need to put some thought into this issue.
I have a neat tool called the “Beneficiary Form Checklist” that is a great way to help get your beneficiary designations in order; give me a call or go to my website (www.EricCHagen.com) if you’d like to receive a complimentary copy. I’d also be happy to set up a time to walk through your beneficiaries with you if you have not done so in the last two years.
As always, if you have questions or comments, please give me a call!