Wednesday, June 18, 2014

Retirement Account Beneficiaries: An Often Overlooked Aspect of Estate Planning

By Bryce Crawford

The beneficiary designation on 401(k) and IRA accounts is the most commonly overlooked, and one of the most important aspects of estate planning and wealth management.  By recent estimates, Americans currently have $5.9 trillion invested in 401(k) plans and another $6.5 trillion in IRAs.  For the most part, the distribution of the assets in your retirement accounts upon your death is not governed by your will or trust, but rather the beneficiary designation on the account itself and the federal Employee Retirement Income Security Act (ERISA).  

The importance of updating your beneficiary designations on your retirement accounts following changes in your life cannot be understated.  Many times, these designations were jotted down quickly years ago as you filled out pre-employment paperwork.  In order to ensure that your hard earned assets pass according to your intent upon your death, you should update you beneficiary designations any time you get married, divorced, have children or undergo any other major life changes. 

Here are some key rules governing retirement accounts to help you make the right designations as your family grows and changes.

Rules for Your 401(k)

No. 1: If you are married, upon your death your spouse is automatically entitled to 50 percent of your account regardless of whether someone else is the named beneficiary.  If another person is the named beneficiary, your spouse will receive 50 percent of the assets and the named beneficiary will receive the other 50 percent.  Your spouse can sign a waiver of his or her right to 50 percent of the account.  However, this cannot be done by prenuptial agreement.  Only a spouse can waive this right, not a fiancĂ©.    

No. 2: If you are single when you die, your 401(k) assets pass to the designated beneficiary on the account no matter what your will states.  If you get divorced and your ex-spouse does not receive rights to any part of your 401(k), you MUST update your beneficiary form with the name of your new beneficiary.  If you die single leaving your ex-spouse named as the beneficiary of your 401(k), he or she will receive the account even if your will designates that all of your assets go to your children.

Rules for Your IRA

No. 3: Unlike 401(k) plans which are governed by federal law, IRA accounts are governed by state law and afford you much more freedom in designating a beneficiary.  Generally, you may designate anyone you like as the beneficiary of your IRA without your spouse’s consent and your spouse will have no interest in that account upon your death if he or she is not the beneficiary.  Also unlike 401(k) plans, if you name your spouse as the beneficiary of your IRA and later divorce, that designation is null and void upon your death under most state laws.  In that instance, your account would pass according to the default plan laid out in your IRA document.

Recent statistics show that 401(k)s and IRAs make up approximately 60 percent of the assets of U.S. households investing at least $100,000.  Assuring that these assets pass according to your intent upon your death can become complicated with both federal and state laws controlling those accounts, especially when the owner of the accounts divorces, remarries, or has subsequent children.  The help and knowledge of experienced estate planning attorneys is often necessary and invaluable to ensure that you make the proper beneficiary designations.   For more information contact the experienced estate planning attorneys at the Williams Law Group.

                                                                                    The Williams Law Group, PLC
                                                                                    4201 W. New Hope Rd., Suite 202
                                                                                    Rogers, AR 72758
                                                                                    Phone: (479) 633-8421
                                                                                    Fax:     (479) 633-8058

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