By Craig Eissler, CFP®, CIMA®, AIF®, Wealth Advisor
Oftentimes when advising clients and helping them prepare for retirement the focus is typically always on the numbers and investment returns. However, it is said that a perfectly crafted, perfectly executed financial plan for retirement can be easily blown up by a poorly crafted estate plan.
Someone can do an amazing job of accumulating wealth or growing their assets to live a comfortable retirement. But if they neglect what might happen to those assets upon their passing it could be all for not. That’s why it’s important to not only make sure retirement plans have correctly named beneficiaries but also to regularly review those to make sure they are up to date.
Why Name ERISA Retirement Plan Beneficiaries At All?
It’s in an ERISA account owner’s best interest to have specific beneficiaries designated in retirement accounts. This will facilitate the transfer of assets to the intended recipients upon the account owner’s death. Naming a beneficiary will allow these assets to bypass probate, allowing for a more efficient transfer of wealth and potentially reducing legal fees and taxes.
The probate estate process is a legal procedure in which a deceased person’s will is validated by the courts, and their assets are distributed to beneficiaries. The specific steps and requirements of probate can differ significantly from state to state, reflecting variations in state laws. The probate process can take from six months to several years to settle an estate and individuals should plan strategically to potentially simplify or avoid the probate process for their beneficiaries.
Who Can Be a Beneficiary In An IRA?
While an IRA is not under the jurisdiction of ERISA, it is still a retirement account and thus needs beneficiaries designated just like ERISA accounts. IRA beneficiaries can include spouses, children, parents, trusts, or charities. The rules for handling inherited IRAs can vary depending on the relationship to the original owner. It’s important to carefully select beneficiaries, as the decisions can have significant tax implications and affect the distribution of assets.
What Happens If I Don’t Name a 401k Beneficiary?
In the absence of a named beneficiary for a 401k plan, the default rules outlined in the plan documents typically take effect. These rules often designate the spouse or children as the default beneficiaries. However, without a named 401k beneficiary, the assets usually go through the probate process, which can be time-consuming and costly.
If the default beneficiary comes into play, the process is different from one in which a beneficiary is specifically named. A named beneficiary gains control of the 401(k) automatically on your death without any delay or cost. For a default beneficiary to take ownership of the account, it generally will have to go through probate first.
While many 401k plan administrators and plan participants focus on the participation numbers, deferral rates, investment options and performance, very few focus attention on making sure participants have beneficiary designations on file.
Why it’s Important to Keep Your 401k Beneficiary Up-to-Date
In a recently published article in the Wall Street Journal about retirement plan beneficiaries, a story was told about someone who had named his then girlfriend of his workplace retirement account. Only to find out later down the road, they have been long broken up and his beneficiary designation never updated, she is now set to inherit his retirement account much to his now family’s dismay leading to lengthy court battles.
Not only is it important to identify and name beneficiaries on all retirement accounts, it is equally important to review those and update those regularly. We regularly check our clients retirement plan beneficiaries just to make sure they are current and up to date. We want to make sure our clients wishes are adhered to upon their passing and not leave their airs battling it out in court for years over something that could have easily been avoided early on.
Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
