Your will may be updated, but if you haven’t looked at your beneficiary designations on documents like life insurance policies, IRAs or investment accounts, your estate plan may have a big vulnerability that needs to be buttoned up.
As WTOP’s recent article, “7 common mistakes to avoid when naming your beneficiaries,” explains, after any major life change, like a marriage, divorce, birth of a child, or death of a spouse, you need to review your beneficiary designations. It’s also wise to review them on a more regular basis.
We all have opened multiple bank, investment, and retirement accounts that require us to name beneficiaries directly for each account. It is important to remember how important this is, because these direct beneficiary designations supersede a will. They should be reviewed carefully and aligned with your estate plan. While California law impacts beneficiary designations after a divorce, state law does not apply to retirement or other plans governed by federal law, under which the beneficiary designation controls regardless of state law.
How your accounts are titled will determine whether they’ll go through probate at your death. However, proper account titling lets you avoid probate and transfer assets directly to your named beneficiaries, since these assets pass outside of your will.
If you fail to name a beneficiary, your assets will go through probate. However, with a retirement plan or life insurance company holding your assets, there may be a contract term that designates a “default” beneficiary which may not be what you’d want. In addition, there could be some avoidable tax liabilities.
If you name your estate as the beneficiary for your retirement plan, the distributions go through probate and are more limiting than if you had named a spouse or non-spousal beneficiary. Either a lump sum makes the entire retirement amount taxable at that time or within five years of the decedent’s date of death and taxable at the time of distribution.
However, a spousal beneficiary can roll over retirement proceeds directly into her own IRA and take required minimum distributions (RMDs) based on her age, rather than the decedent’s. A non-spousal beneficiary can establish an inherited IRA and withdraw an annual amount based on his life expectancy.
An experienced estate planning attorney and/or financial will be able to review your investments, accounts and life insurance policies to make sure that they are titled properly, your beneficiary designations are up-to-date and that they are all aligned with other estate and legal documents.
Reference: WTOP (February 21, 2018) “7 common mistakes to avoid when naming your beneficiaries”