Thursday, October 22, 2015

Recheck your beneficiary designations

Most people who have money in tax-deferred retirement accounts such as IRAs or 401-k plans know that it is important to name a designated beneficiary (DB) and a contingent beneficiary (CB) for those plans. The Federal statutes that govern these plans provide:
  • The account will be payable to the DB and can be paid out over the DB's life expectancy.
  • The account will be payable to the CB in the same fashion if the DB dies before the owner of the account.
  • If there is no DB or CB, the account is payable as the plan documents direct, and that may be to the estate of the owner.
  • If there is no proper DB/CB, the entire amount in the account must be distributed, as taxable income, within five years of the owner's death.
  • The owner's spouse must be the DB for "qualified" retirement plans, including 401-k plans, unless that right is specifically waived in writing.
We always recommend that the designations be reviewed in the event of any major life change, such as marriage, divorce, death, or retirement.

It is also a good idea to check the designations every year or two, even if no life change has occurred, to ensure that what was previously designated remains in place. We frequently hear about accounts for which a DB and CB were properly designated but for which the custodian has, for whatever reason, lost track of the designation. The owner of the account can correct such errors while he is alive. The family members who are disappointed after he dies cannot do so.