When I was a financial planner, there were a lot of little things that came up over the years that I realized went unnoticed by the vast majority of people, no matter how well educated they were in finance and investing. Understanding, setting and updating the beneficiaries on accounts like IRAs was one of those things that slips through the cracks for many people. Of course, IRA plans aren’t the only accounts with beneficiaries on them. Be sure to check your life insurance accounts, annuities, 401k accounts, and other retirement plans to keep them up to date. Without this important part of estate planning, all your other efforts might be for nothing.
Will Versus Beneficiaries
One of the most important things to understand about accounts with beneficiaries, is that that accounts only become a part of your estate after your die, IF AND ONLY IF, there are no living beneficiaries assigned to the account. What that comes down to is that updating your will and changing who you are leaving what, does NOTHING to affect how your insurance or IRA account balances are distributed upon your death. Even if you specifically disinherit someone in your will, they will still get any amount designated on accounts with beneficiaries. This distribution is very difficult (impossible for anyone but the very wealthy) to challenge in court.
Do not think that changing your will changes how your IRA accounts, or others, will be distributed after you are gone. It is very important to understand how beneficiaries work.
Reviewing Your IRA Beneficiaries
Whenever you open an IRA account, a life insurance policy, or other tax-advantaged account, you have the opportunity to setup both primary and contingent beneficiaries, sometimes referred to a secondary beneficiaries. Typically, whoever is helping you open the accounts will walk you through setting up your beneficiaries, and most times, they are set correctly at that time. However, the nature of these accounts is such that they are often open for a very long time, and while they investments within the accounts may be reviewed regularly, the actual account itself is seldom looked at.
There are many common life changes that could affect how your beneficiaries are setup. The most common beneficiary setup, if you are happily married, when you setup your IRA account, is your spouse is listed as the primary beneficiary for 100 percent of the account value. Your children are often the contingent beneficiaries in equal amounts, or if they are younger, a trust for their benefit may be the beneficiary. But, over 20 years, things change, and your beneficiaries need to change with them. Unfortunately, that does not happen automatically.
If the person in our example above has another child, for example, that child gets nothing unless the beneficiaries are changed. Even if the will is updated to reflect another share, that will have no impact on an IRA account. While divorce can also change how you want your beneficiaries setup, it is common for the court to review, and maybe even issue and order, about how the IRA beneficiaries are constructed. However, as your life changes and the lives of the people around you change, it is important to keep your beneficiaries up to date.
If you have a financial advisor, they should review your account beneficiaries with you on a regular basis. If they don’t bring it up, be sure that you do. Even if you do have an advisor who reviews things, they may not have the necessary access to review your active 401k account, so be sure to show them a statement or call your HR department. If you manage your own accounts, check your statements or online access. If you can’t find, in writing, who your beneficiaries are, it’s time for a phone call to find out. Don’t forget any spousal IRAs that you and your spouse have as well.
In most cases there won’t be any changes, but get in the habit of regular review. Annually going through your accounts to make sure everything is setup the way you want is a good way to ensure that there are no problems after your death, and that everyone is taken care of in the manner you wish.