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"More Details About Wills & Beneficiary Designations" by Julie Jason

Originally published: Sep. 2, 2022 (distributed by Andrews McMeel Syndication)

     If you have an individual retirement account, as tens of millions of U.S. households do (according to the Investment Company Institute -- tinyurl.com/mr3czcbv), you had the chance to name a beneficiary. The beneficiary designation form was provided to you by your IRA custodian, the firm that holds your IRA assets. Why is a beneficiary designation important? Because it serves as a "will substitute," which means it takes the place of your will to transfer your IRA to heirs. 

     Keeping documents up to date when new children are born is particularly important for IRA beneficiary designations. Take this example. 

     Say you wrote your will in 2010 when you were married and had one child. At that time, you named your wife, Susan, beneficiary of your IRA and your child as a contingent beneficiary. In your will, you left all of your assets to your wife, and if she predeceased you, your assets were to go to your living children and later-born children in equal shares. 

     You and Susan had a second child in 2012. You did not update your will, nor your IRA beneficiary designation. Susan died in 2015. You're still alive and well, but who gets what if you die?

     Under the will, both children would receive their inheritances -- each getting half of what you owned at death, after taxes and probate fees, executor's fees and attorneys' fees, excluding non-probate assets. 

     Non-probate assets are assets that pass outside of your will. In this case, that's your IRA. Your oldest child gets 100%, not 50%, of your IRA, because of your beneficiary designation. 

     This is just one reason to review your beneficiary designations (including contingent beneficiaries) for retirement accounts, life insurance policies, transfer-on-death accounts and other will substitutes to make sure that those documents reflect your wishes.

     When doing your review, pay special attention to 401(k)s. Let's add a 401(k) to my example, with the beneficiary designation naming Susan, your wife, as primary beneficiary and your first child as contingent beneficiary. 

     After Susan died, you remarried. You would expect your first child to inherit your 401(k) at your death because of your 401(k) beneficiary designation. However, because of special rules that apply to 401(k)s, your current wife takes precedence over your child. Why? Special rules apply to 401(k)s under ERISA -- the Employee Retirement Income Security Act. (A spouse takes precedence unless he or she signs a "spousal waiver.") There is another potential pitfall to avoid. 

     If you don't name a beneficiary for your IRA, the IRA custodian documents that govern the IRA take effect. Be sure to check yours. You may find that the surviving spouse becomes the beneficiary, or if there is no surviving spouse, the IRA owner's "estate" is the beneficiary. Or, you may find that children are the beneficiaries if there is no surviving spouse. 

     Because different tax rules apply to different types of beneficiaries, it is doubly important to review beneficiary designations with your lawyer. 

     While it may seem burdensome to take on a full review of documents on a regular basis, make sure you don't put that off when a new family member arrives (or departs). 

     As for help, I would turn to my IRA and 401(k) custodians to get current copies of beneficiary designations on file, as well as copies of custodian agreements to review the language that controls it if there is no beneficiary designation on file. 

     A high-net-worth client of a prestige money management firm can reasonably expect the firm to review beneficiary designations as part of their services. Clients of other firms will have to ask for documents and review them on their own or with their lawyers.

     Taking action now can help you avoid unintended consequences. No, let me state that in a different way: Taking action now can avoid something you cannot undo after you pass away.

To read Julie Jason's books, go to: https://juliejason.com/author/julies-books.