If you’ve had an IRA and a 401(k) for many years, you may
occasionally ask yourself some questions: “Am I contributing enough?” “Am I
still funding these accounts with the right mix of investments for my goals and
risk tolerance?” But here’s one inquiry you might be overlooking: “Have I used
the correct beneficiary designations?” And the answer you get is important.
It wouldn’t be surprising if you haven’t thought much about
the beneficiary designation – after all, it was just something you once signed,
possibly a long time ago. Is it really that big a deal?
It could be. For one thing, what if your family
circumstances have changed since you named a beneficiary? If you’ve remarried,
you may not want your former spouse to receive your IRA and 401(k) assets or
the proceeds of your life insurance policy, for which you also named a
beneficiary.
However, upon remarrying, many people do review their estate
plans, including their wills, living trusts, durable powers of attorney and
health care directives. If you’ve revised these documents, do you have to worry
about the old beneficiary designations? You might be surprised to learn that
these previous designations can supersede what’s in your updated will and other
documents. The end result could be an “accidental” inheritance in which your
retirement accounts and insurance proceeds could end up going to someone who is
no longer in your life.
Furthermore, your retirement plans and insurance policy may
not just require a single beneficiary – you may also be asked to name a
contingent beneficiary, to whom assets will pass if the primary beneficiary has
already died. As you can imagine, the situation could become quite muddled if
stepchildren are involved in a remarriage.
To avoid these potential problems, make sure to review the
beneficiary designations on all of your accounts at some point – and especially
after a significant change in your family situation. If you see something that
is outdated or incorrect, contact your retirement account administrator – or
your insurance representative, in the case of life insurance – to request a
change-of-beneficiary form.
And if you really want to be on the safe side, you may want
to enlist a legal professional to help you with this review to make sure the
beneficiary designations reflect your current family situation and are
consistent with what’s in your estate plans.
In fact, if you’re already working with an experienced
estate planning attorney – and you should – you might also pick up some other
suggestions for dealing with beneficiaries. Just to name one, it’s generally
not a good idea to name minor children as beneficiaries. Because children can’t
control the assets until they become adults, a court would likely have to name
a guardian – one that you might not have wanted. Instead, you could either name
your own custodian to manage the assets designated to the minor or establish a
trust for the benefit of the minor, which can distribute the money in several
disbursements over a period of years – which is often a good move, since young
adults aren’t always the best at managing large lump sums.
If you’re like many people, you have a strong desire to
leave something behind. But you’ll want to do it in the right way. So, pay
close attention to your beneficiary designations – when you first create them
and throughout your life.
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