Importance of Proper Beneficiary Designation on Retirement Accounts

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Importance of Proper Beneficiary Designation on Retirement Accounts

by | Aug 12, 2016

Since retirement accounts are not part of a previously established Will, they are not governed by its provisions. Hence, it is important to keep the beneficiaries on such accounts up- to-date as any changes made on your Will/Estate will not be reflected on your retirement accounts. Furthermore, any designations on retirement accounts would supersede the designations on Wills. 
For instance, suppose Joe designates his wife as his sole IRA beneficiary when establishing the account and they divorced and remarried. If he updated his Will to reflect these changes, but not his IRA account, the money in the IRA will go to his ex-spouse regardless of what his Will stipulates.  It would be a true hassle for the surviving spouse to prove in court Joe’s true wishes before passing.

Similarly, if Joe doesn’t include children that were born after an initial beneficiary designation. It would be difficult to prove he wanted the money to be distributed among all his children and not just the ones reflected in the IRA account. Thus, to prevent these situations, beneficiary designations should be updated periodically after a major life event or any changes in family status take place; not only on your IRA or Will/Estate, but also on Trusts, annuities, and properties.

Even if a major life event never occurs, as a general rule of thumb it is advisable to review estate documents and beneficiary designations every three to four years. Also, you should not only assign primary beneficiaries but also contingent beneficiaries. If you assign your spouse as a primary beneficiary but God forbid, you both pass simultaneously (a fatal car accident, for example) and no contingent beneficiaries are assigned, the assets would pass to your estate resulting in a probate process. Through probate, the state decides how your assets are distributed and who will be the personal representative – the person in charge of your estate after you die. There could also be the risk of creditor claims if there are debts owed before passing. If you have children, you definitely would want them to have precedence over creditors and you wouldn’t want the state or a representative to decide how they’ll inherit the money.

By assigning primary and contingent beneficiaries on your retirement accounts and other assets, you could prevent all the previously mentioned scenarios. Everything should be synchronized to ensure your legacy carries on with the ones you love.


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