Putting on Heirs-Who Inherits your Retirement Assets?

Putting on Heirs-Who Inherits your Retirement Assets? Do you think it's a lot of work to create an estate plan? It certainly can. However, it may only take a few minutes to create one for your retirement savings. It can take just long enough for you to complete and sign the Beneficiary Designation Form for your account(s). If you're like many people, you probably don't realize that your retirement savings will pass to the beneficiaries named on this form, not to the heirs named in your will or other estate-planning documents.

Like most of us, it's likely that you don't spend much time thinking about your beneficiary paperwork. You may not even remember who you listed on the designation form or where the form is located. But since your retirement nest egg may be one of your largest assets, it's essential to take the time to review and possibly update your beneficiaries every few years. Below are some frequently asked questions and answers to guide the review process.

I have a current will. Isn't that all I need?
The beneficiaries named on retirement accounts override a will. Time may have passed, things may have changed and your designated beneficiaries may no longer reflect your current wishes. If you neglect to update your beneficiary forms, your hard-earned retirement money may not be passed along the way you want it to today. Depending on the circumstances, significant amounts of these savings also could be lost to taxes.

How do I know if I have named the beneficiaries I want?
Ask your professional financial advisor to help you review the forms to ensure that beneficiaries are properly named and the forms are signed. If you can't locate the forms, your advisor can help you trace or replace them.

Do I really need contingent beneficiaries?
Yes, you need to name a contingent beneficiary as well as a primary beneficiary. If a primary beneficiary dies and you haven't named a contingent, the assets are distributed according to the default rules of your retirement plan after your death. Some plans will default to the spouse while others default directly to the estate.

I'm thinking of naming my estate as beneficiary.
Is this a good idea? By naming your estate as beneficiary, your retirement assets will probably have to go through probate, a court process that is both time consuming and costly to your heirs. Further, depending on the situation, this could increase the tax bill and limit payout options for your heirs.

Should I name my young children as primary or contingent beneficiaries?
Although minor children can't legally control assets, parents can name guardians, custodians or trustees in advance to manage finances for them after their deaths. If this isn't taken care of ahead of time, the court will need to name a guardian for the child and the assets. In addition, minor children can take control of the assets when they reach the age of majority -- possibly as early as age 18 in some states ? unless other arrangements are made.

How about naming a qualified trust?
Think about situations in which you "don't trust" or want to maintain control over your assets. For example, if there are minor children or spendthrift heirs, naming a qualified trust as a beneficiary might be a good choice. In these cases, a trustee could carry out your wishes.

Are there any problems with naming a charity as my beneficiary?
Few issues arise when a qualified charity is named as the only beneficiary of your retirement assets. However, if there are multiple beneficiaries and one of them is a charity, there could be negative tax issues for the heirs if the charity isn't paid by the deadline (Sept. 30th of the year following the year of the IRA owner's death).

What are some common mistakes made when updating beneficiary forms?
  • Never naming contingent beneficiaries or not identifying a new heir after the death of a primary beneficiary.
  • Forgetting to remove an ex-spouse after divorce and/or remarriage.
  • Failing to update the form after the births or adoption of additional children.
  • Young, single adults naming their parents as beneficiaries and then forgetting to update the forms after they marry, have children and/or their parents die.
  • Naming the estate as beneficiary.
Is there any other advice you would give me?
  • Make it a habit to review and/or update your financial papers, including your beneficiary designations, every time you experience a major life event.
  • Be aware that the rules governing your retirement assets usually vary by plan and provider. It's a good idea to keep copies of documents and custodial agreements and review them with your qualified financial advisor.
  • One of the most powerful financial legacies you can leave is ensuring that your beneficiaries have flexible options with respect to payouts of your retirement plan assets over their lifetimes, sometimes referred to as a "stretch" IRA. Be sure to ask your financial advisor to review this powerful estate planning strategy with you.

This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation. American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer.

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