As this is the beginning of the New Year, one of your tasks should be to make sure your plan beneficiary choices are up to date. While many people periodically update their wills or other estate plans, they don’t remember to update the designation of who will receive distributions from their retirement plans, such as an IRA or 401(k) fund. You should also review any and all life insurance beneficiary designations.
The following are some tips for naming a retirement plan beneficiary.
Name a beneficiary: Do not assume that your retirement plan will be distributed according to your will. If you don’t name a beneficiary, the distribution of benefits may be controlled by state or federal law, or according to your particular retirement plan. Some plans automatically distribute money to a spouse or children. While others may leave it to the retirement plan holder’s estate, which could have negative tax consequences and additional expenses resulting in a probate action. It can also result in a lump sum distribution to a child when they attain the age of 18 even though your trust document may have other restrictions.
You may want to designate a trust as your beneficiary. If your estate is more than the current estate tax exclusion ($2 million for 2008 and $3.5 million for 2009) and a large portion of it consists of retirement plans, it may make sense to direct that the plans be payable to a trust rather than to the surviving spouse. The trust must be properly drafted to avoid tax consequences, so consult with your attorney before doing this.
Update after major life changes. If you get married or have children, you may want to change your beneficiary. Also, if your spouse was your beneficiary and you got divorced, your former spouse will still be the beneficiary. Divorce does not automatically remove an ex-spouse as beneficiary.
Review your beneficiary designation periodically. Your beneficiary may not be who you remembered it to be or it may be outdated. A change of beneficiary form can often be downloaded from the website of the firm holding the plan assets.
Ms. Macdonald’s practice is limited to Estate Planning, Probate and Elder Law. Ms. MacDonald maintains her practice in the Santa Clarita Valley at 27013 Langside Avenue, Suite A in Santa Clarita. She can be reached at 661-251-1300.