Marc A. Hebert's Money Sense: The law determines your beneficiaries unless you intercedeBy MARC A. HEBERT
January 22. 2016 7:57PM
WHEN was the last time you checked your beneficiary designations on your retirement plans and other accounts? It is an easy thing to overlook, but an important step in estate planning. At your death, certain assets pass to beneficiaries named on your accounts, regardless of whether someone else is named as the recipient of your assets in your will! Let's consider some of the implications of failing to review your beneficiaries.
Even though New Hampshire has a lower divorce rate than the national average, perhaps you were recently divorced. The divorce decree you signed doesn't automatically terminate the former spouse's beneficiary designation on separate documents such as employer-sponsored retirement accounts, IRAs and life insurance policies, to name a few. If your former spouse remains as the beneficiary on an account, he or she has the potential to inherit your assets instead of your children or a new spouse.
Even without a divorce, there are unintended implications for your money after your death. For example, when it comes to retirement plans, if you named your spouse as the primary beneficiary, that individual has the right to transfer all or part of the retirement assets into his or her own IRA account after your death. This means the surviving spouse could name children from a previous or future marriage as beneficiaries once it is his or her money. In some cases the unintended consequence is that the original IRA owner's children could be legally shut out of any benefits.
In recognition of a spouse's rights, the law requires that your spouse be the primary beneficiary of a 401(k) or profit-sharing account. Your spouse may waive this requirement in writing so that other planning techniques can be used. In some instances this spousal waiver can make sense. Take the example of the spouse who is financially independent and wants to earmark the account for philanthropic pursuits. Another example is where children from a first marriage are more likely to need the money. If you are not married, you can name whomever you want as the primary beneficiary.
Tax laws also dictate how retirement plan assets are distributed to your beneficiaries at your passing. If done properly, your beneficiaries may be allowed to continue the tax deferral for a long time. As these rules are complicated and change, you should discuss them with your tax adviser or financial planner.
Given the importance of your beneficiary designations, start by taking an inventory of your accounts and contact your employer-sponsored retirement plan and/or IRA administrator and life insurance companies to review your beneficiary designations. Some custodians provide this information on their websites, so if you have online access the process can be quick and easy.
It is important to make sure the beneficiary designations are coordinated with your estate documents, so you might want to involve your estate planning professional in the process. Your attorney will help with such terms as “per stirpes” and “per capita.” If you are using trusts in your estate plan, you might want to discuss whether or not your trust should be your retirement plan beneficiary. Professionals can also help you deal with planning for minor children and those with special needs.
Once you have done your review and updated your designations, keep copies in a safe place. Your family should know where the designations can be found, which is ideally alongside your other estate planning documents. Life happens, and whenever major events occur like divorce, becoming a parent, switching jobs or death of a spouse, your current beneficiary designations need to be reviewed. An improper designation can make life difficult for your survivors and quite possibly could mean that your wishes might not be met.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at firstname.lastname@example.org. Your question and his response might appear in a future column.