Philadelphia PA Estate Planning Blog

Recently, I suggested to a client that she check her beneficiary designations on her IRA. She insisted her family was named as beneficiaries properly, so when the company sent her the list of names, she was surprised to find a stranger’s name on the list. Mistakes do happen, and unfortunately, a Will does not help sort out problems with beneficiary designations. Therefore, it’s crucial to check these regularly and fix errors and omissions.

Most of us know that you need to regularly review and update your wills or other estate plans. However, we often forget to update who will receive distributions from our retirement plans (such as IRAs and 401(k)s). Every 3-5 years, you should review your entire estate plan, and the review should include retirement plan "beneficiary designations" to make sure they aren't outdated. The following are some tips for naming a retirement plan beneficiary:

• It is important to 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, this could have negative tax consequences. The only way to control where the money goes is to name a beneficiary.

• You may want to designate a trust as your beneficiary. If a large portion of your estate consists of retirement plans, it may make sense to direct that the plans be payable to a trust rather than to beneficiaries directly. This is primarily done for asset protection purposes (consider, for instance, what would happen if your child got divorced after they received their inheritance—a trust helps deal with that situation). The trust must be properly drafted to avoid tax consequences, so consult with your attorney before doing this. If you want your money to go into a trust for your children, be sure to designate the trust as the beneficiary. If you name your children, the money will go directly to them and there will be no asset protection!

• Consider Grandchildren: A portion of the IRA or retirement assets left to grandchildren is a true legacy plan. It is the gift that keeps on giving (and growing) throughout their lifetime. Want something lasting to be remembered for? This may be it. A trust would be most appropriate in this circumstance.

• If you have major life changes, be sure to keep your retirement plan updated. If you get married or have children, you may want to change your beneficiary. Also, if your spouse was your beneficiary and you get divorced, your former spouse will still be the beneficiary -- divorce does not automatically remove an ex-spouse as beneficiary. If you wish to remove a former spouse from the plan, you will have to fill out a new beneficiary designation form.

• Even if you don't have big changes, you should review your beneficiary designation periodically. Your beneficiary may not be who you remembered it to be or it may be outdated. For example, if you named a charity as beneficiary, you will want to make sure the charity still exists. A Change of Beneficiary form can often be downloaded from the Web site of the firm holding the plan assets.