Getting
to Know Your Beneficiaries
Ambrose
Bierce, a 19th-century writer known for his sardonic outlook, once remarked,
“Death is not the end. There remains the litigation over the estate.”1
Bierce died long before
the individual retirement account (IRA) and the 401(k) plan came along.2
He might be surprised to learn that these retirement plans aren’t subject to
probate, even though they are part of an individual’s estate. Retirement plan
assets pass directly to the account beneficiaries without a will.
For that reason, it’s
critical to make sure you have correctly named your beneficiaries. By avoiding
some common mistakes, you can potentially exercise greater control over who
inherits the assets in your retirement plan.3
Unnamed
Beneficiaries
It’s not uncommon for some investors to delay naming primary or secondary
beneficiaries when they first set up an account, and they may forget to take
care of it later. If no living beneficiaries are named, the consequences will
vary according to the financial institution, but in most cases the money will be
considered to be part of the account owner’s estate and subject to the
applicable taxes.
Incorrect
or Outdated Beneficiary Designations
The birth of a child, a change in your marital status, or the health status of
your heirs can trigger the need to review your choice of beneficiaries. If you
have minor children, you might want to consider setting up a trust and making it
the beneficiary of your retirement plan.4
Otherwise, the state likely will control the money and turn it over to your kids
in a lump sum when they reach legal age, regardless of any instructions in your
will.
Overlooking
Tax Consequences
IRAs and 401(k) plans can potentially be subject to income taxes and estate
taxes. If the retirement plan hasn’t been structured properly or if your
estate is the beneficiary, your heirs might collect a fraction of the original
value after taxes. By taking the appropriate steps, you may be able to help
reduce the impact of taxes and preserve the value of your accounts for future
generations.
Ignoring the role of
retirement plans in your estate planning can be costly. By periodically
reviewing your retirement plan beneficiary designations, you may be able to
exercise greater control over how your assets are distributed when you are gone.
1) Brainyquote.com
2) Distributions from traditional IRAs and 401(k) plans are taxed as ordinary
income and, if taken prior to reaching age 591/2,
may be subject to an additional 10 percent federal tax penalty.
3) The use of these approaches can involve a complex web of tax rules and
regulations. You should consider the counsel of an experienced estate planning
professional before implementing such strategies.
4) Before you take any specific action, be sure to consult with your tax
professional.
©
2002 Emerald Publications
