Question: I have recently rolled over my 401(k) plan into an existing IRA. I am not sure if I need to update the beneficiary designation forms on file; can you give me some advice?
Answer: Some of the most costly estate planning mistakes can involve retirement accounts and are usually made in the beneficiary designation forms. When you originally opened your account, you should have completed a beneficiary designation form. You should periodically check such designations with the investment company directly to make sure they have the beneficiaries you intend. Rolling over your account is opening a new account, so you should definitely complete beneficiary designation forms at that time. Additionally, you should be sure to update your beneficiary designations in the event of a major change in your family situation. For example, if one of your beneficiaries has gotten married or divorced, has had children, or if a loved one has passed away.
Your IRA beneficiaries may include your family members, friends, charities or a trust. It is important to name both primary and contingent beneficiaries. A minor should never be named as the beneficiary of a retirement account as the law does not allow them to take control of the account or take advantage of continued tax-deferred status. The only way to access the account is for the Court to appoint a guardian for the property of the child. This would typically be the parent of the minor beneficiary. This proceeding is costly and avoidable. After the guardian is named, the Court will direct the Guardian to distribute the entire IRA and income tax would have to be paid. In addition, the distributions left will be deposited in a bank account earning very little interest.
Instead of making the mistake of naming a minor outright, you may name a trust for the minor’s benefit. This will allow the minor beneficiary’s share to be rolled into an Inherited IRA, thus preserving the tax-deferred status on the funds. If you wish to name a trust as the beneficiary, the trust must be properly drafted and meet certain requirements set by the IRS in order to accept the IRA distribution. An experienced estate planning attorney should prepare this trust.
Additionally, you should not name your estate as the beneficiary. This would produce the same results as failing to designate a beneficiary or if your primary beneficiary is deceased and you do not have any contingent beneficiaries listed. This could reduce the tax benefits available to these tax-deferred accounts. Depending on the type of account, this could mean that all funds must be withdrawn within five years or it could force the beneficiary to use the distribution rate based on the age of the deceased person. This does not allow multiple beneficiaries to use their own life expectancy when taking distributions from the IRA.
Before naming a beneficiary on an account, you should check with the institution holding the account. Each plan has its own individual rules regarding the designation of beneficiaries. For example, certain institutions may allow naming a living trust as a beneficiary, however, they may not allow a trust created under you Last Will and Testament as a beneficiary. Retirement savings can be the largest asset one leaves behind. Being sure it is properly designated can protect the best interests of your beneficiaries long after you are gone.
— Elaine Siegmund, Esq. and Nancy Burner, Esq.