September 6, 2014

Do You Know What to Expect in Retirement? Part 2 - Naming a Beneficiary

After last week's two posts, I received numerous emails, and the most troubling questions to me dealt with a lack of knowledge regarding beneficiaries. This post will hopefully be a good basic resource to use for individuals trying to understand why and how to name beneficiaries. This list is not exhaustive though, so please make sure you talk with your financial advisor or attorney if you have one. They should be able to answer any additional questions.

Can't I just make my retirement account a joint account?

A retirement account is only titled to a single individual. It does not matter if it is pension, IRA, Roth IRA, SEP-IRA, 403(b), 401(k), etc. They are only "owned" by a single person. They cannot be made into joint accounts with your spouse, children, etc. One owner only.

Do I really need to name someone as a beneficiary?

YES!!! There are numerous advantages including being easier to access, not having to deal with the probate court, and tax advantages/options for your beneficiaries.

If you are married, a pension or 401(k) account must have your spouse as the primary beneficiary (unless they allow themselves not to be named), but you should always name contingent beneficiaries too. If something happens to both of you, this will direct who should receive the funds.

My brother, Brad, opened a small Roth IRA as an additional savings account with his bank a few years ago, and while completing the application, Brad forgot to name someone as his beneficiary. Not good.

Brad obviously rarely thought of the account, and when Brad and I discussed his financial accounts, he did not even mention the account. It only had a balance of only $500, and I managed essentially all of his money anyway.

Brad passed away in February 2013, and a few months later Wells Fargo alerted my parents to the account. Since Brad was not married and did not have kids, numerous court documents and forms would need to be completed. One of the documents was a small estate claim form that costs $300 to file along with an appearance in probate court. An additional letter signed by an attorney verifying that Brad did not have children. The costs of these items was close to $400 plus personal time... all to get $500.

Honestly, I do not think my family would have cared if Brad had named a charity, relative, friend, or even some random person... any of that would have been better than the cost and hours of time that has been spent (and still being spent) to collect $500.

Yes... name a primary beneficiary(ies) and contingent beneficiary(ies). It will help those you leave behind.

Doesn't my will cover my retirement accounts?

Actually, not necessarily. If your will says your retirement account(s) should go to Joe Smith, but the beneficiary form(s) with the financial institutions say that they should go to Bob Black - the money goes to Bob Black. Joe Smith can try to fight it in court, but I have never seen a single case in which the will overruled the beneficiary form.

If you name "The Estate of 'your name'" as the beneficiary, your will would be used, but this involves going through probate court, and generally takes much, much longer and is far more difficult than simply naming those you wish to name.

Also, changing your will is generally expensive. Changing your beneficiary on a retirement account is usually one form, one signature, and free. You tell me which is the better option?

What if my child(ren) is young?

This is a common question since people are worried that the child(ren) is too young now to handle any funds. Two things - 1) you may not die for many years; 2) the custodian of the child(ren) generally is the one that becomes responsible for the funds. The funds though are the child's under the guidance of the custodian.

One thing to note though is that a custodian of a child's account has a "fiduciary" responsibility to do what is in the best interest of the child. If the custodian mismanages the funds, the child can actually sue the custodian - and it has happened.

Name your children as beneficiaries (normally after your spouse) and in your will, make sure to name a responsible person to serve as custodian for your children and the funds.

How often should I update the beneficiaries?

This is a very good question. We usually try to remind our clients to update their beneficiaries when big life events happen - marriage, children being born, a death of a beneficiary, divorce, etc. There can be other times, but these are the basics.


Remember that the reason you are naming a beneficiary is to make sure that your hard earned retirement funds are going to the person/people that you want. Do not forget to do this one little thing that will save your survivors time, money, and frustration.

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