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Do You Know Who Your Beneficiary Is?

If qualified retirement plans and IRAs make up a significant portion of your estate, you should consult with your estate planning attorney to make sure that you are planning for the retirement accounts correctly. Failure to obtain proper advice on designating beneficiaries for retirement assets may result in costly errors, including unnecessary tax. In order to avoid common mistakes, remember the following: 

1. Your beneficiary designation trumps the provisions in your will or trust. Coordinate your beneficiary designations with your estate plan. 

Many people think that their will or trust governs how retirement assets are paid at death. Not true. Beneficiary designation forms control who receives your retirement assets at your death. It doesn’t matter who your beneficiary is under your will or trust: your beneficiary designation form controls who receives your retirement account. 

2. Name a contingent beneficiary.

Designate both a primary and contingent beneficiary for your plan in case your primary beneficiary does not survive you. If you die without a beneficiary in place, your retirement plan probably names a default beneficiary” for you. However, the plan’s default beneficiary may not be who you want to receive the funds.

3. Do not name My Estate” as the beneficiary of your retirement plans. 

Naming your estate as the beneficiary of a retirement asset will generate unnecessary tax and expenses. Assets paid to your estate will be subject to probate, often a costly, public, and time-consuming process. Assets passing to your estate are exposed to claims of creditors. Due to the complications of the minimum required distribution rules, naming your estate rather than an individual as beneficiary will generally accelerate required distributions. Your heirs lose the option for stretch distributions and continued tax deferral.

4. Review and update your beneficiary designations on a regular basis.

Regularly review your beneficiary forms to make sure that the designations are current. Revise your designation if your family situation changes, particularly if there have been a marriage, divorce, death or birth in your family. Keep copies of your completed beneficiary forms and confirm that requested changes are processed. It is not unheard of for financial institutions to misplace or fail to process the beneficiary form.

5. Revise your beneficiary designations after a divorce.

Although Wisconsin law generally revokes beneficiary designations upon divorce, do not assume automatic revocation. State law provides a number of exceptions to revocation upon divorce. In addition, federal law pre-empts state law on revocation for certain retirement plans, such as your 401(k). The best practice is to review your entire estate plan, and re-state your beneficiary designation forms after a divorce. 

6. Do not designate a minor as a beneficiary of your retirement plan.

Minors cannot legally manage money. If a beneficiary is a minor, the plan may require that a guardian be appointed to manage the funds for the minor. Guardianship requires a petition to the court with ongoing court supervision of the guardian, a time-consuming and expensive process. When the child reaches age 18, any remaining property is distributed to the child with no further supervision. Many 18 year olds are not prepared to manage large sums of money and most parents don’t want an 18 year old to receive large sums of money. In order to avoid the complications of guardianship and provide for continued supervision until the child reaches maturity, consider naming a trust established for the benefit of the minor as the beneficiary. 

7. A charity is a tax efficient beneficiary of a retirement asset.

If you are charitably inclined, there are tax advantages to naming a charity as the beneficiary of your non-Roth retirement plans. A charity is not required to pay income tax on post-death distributions. Although an individual beneficiary will be subject to federal income taxation on distributions from an inherited non-Roth IRA or retirement account, a charity that qualifies as a tax exempt charitable organization will not.

8. Complete and review your beneficiary designation carefully.

When completing a beneficiary designation form, make sure that you identify your beneficiary. 

  • Check to make sure that your beneficiary’s name is spelled correctly and the social security number is properly transcribed. 
  • Avoid ambiguities in the designation. For example, do not designate testamentary trust under my will” as your beneficiary if your will creates several testamentary trusts. If the correct beneficiary is the Family Trust established under your will, designate the specific trust.
  • If the beneficiary designation requires witnesses, make sure that your signature is properly witnessed. 
  • Review the beneficiary designation default language carefully. If you name multiple beneficiaries and one predeceases you, are your beneficiaries the remaining beneficiaries or the predeceased beneficiary’s lineal descendants? If you do not like the default distribution, you will need to work with your attorney to revise the designation. 
  • Do not let the beneficiary designation form restrict you. If you intend to name multiple beneficiaries, but the beneficiary form only gives you two lines to list your beneficiaries, you can generally submit an attachment listing all of your beneficiaries. Many plans will allow you to customize a beneficiary designation form.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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