Putting on heirs

Avoid making mistakes that can affect who inherits your retirement assets.

Common mistakes to avoid when updating beneficiary forms:

• Failing to name a contingent beneficiary
• Not identifying a new heir after the death of a primary beneficiary
• Forgetting to remove an ex-spouse after divorce and/or remarriage
• Neglecting to complete a separate beneficiary form for each plan or arrangement, and/or mistakenly assuming that a separate beneficiary can be designated for individual accounts within a plan or arrangement
• Failing to update the form after the birth or adoption of an additional child
• Young, single adults naming their parents as beneficiaries, then forgetting to update the forms after they marry, have children and/or their parents die
• Naming the estate as beneficiary without guidance from your estate planning attorney

Some people may believe creating an estate plan is a lot of work, or that they may not have enough assets to qualify as an estate. However, your retirement savings accounts are an important part of your estate, and it may actually only take a few minutes to finalize one component of your overall estate plan — completing and signing the beneficiary designation forms for your account(s). If you're like many people, you probably don't realize that your retirement savings will pass on to the beneficiaries named on this form, not to the heirs named in your will or other estate planning documents.

It's likely that you don't spend much time thinking about beneficiary paperwork. You may not even remember whom you listed on the designation form or where the form is located. But since your retirement nest egg may be one of your largest assets, it's important to take the time to review and possibly update your beneficiaries every few years. Below are frequently asked questions and answers to guide your review.

I have a current will — isn't that enough?

The beneficiaries named on retirement accounts, whether by default of the retirement plan provisions or named by you, override a will. Time may have passed, circumstances may have changed and your designated beneficiaries may no longer reflect your current wishes.

If you neglect to update your beneficiary forms, your retirement money may not get passed on the way you intend. Depending on the circumstances, significant amounts of your hard-earned savings could also be lost to taxes.

How do I know if I have named beneficiaries?

Ask your financial advisor to help you review the forms to ensure that beneficiaries are properly named and the forms are signed. If you can't locate the forms, your advisor can help you trace or replace them.

Do I need contingent beneficiaries?

It's in your best interest to name a contingent beneficiary in addition to a primary beneficiary. If you haven't named a contingent beneficiary and your primary beneficiary dies before you, the assets will be distributed according to the rules in your retirement plan or IRA document upon your death.

I'm thinking of naming my estate as beneficiary. Is this a good idea?

By naming your estate as beneficiary, your retirement assets will probably have to go through probate — a court process that is both time-consuming and costly to your heirs. Depending on the situation, this could also increase the tax bill and limit payout options for your heirs.

Can I name my young children as primary or contingent beneficiaries?

Although minor children can't legally control assets, parents can name a guardian, custodian or trustee in advance to manage finances for them after their deaths. If this isn't taken care of ahead of time, the court will need to name a guardian for the child and the assets. In addition, minor children can take control of the assets when they reach the age of majority (as early as age 18 in some states) unless other arrangements are made.

Can I name a beneficiary that is not my spouse?

You can name someone other than your spouse as your beneficiary, but in certain situations you will need your spouse's consent. Keep in mind that spouse and non-spouse beneficiaries may have different options available to them when they receive the assets from your account.

I've heard that a "stretch" IRA is an effective way to preserve wealth for my children and grandchildren. What is it?

A "stretch" IRA does not refer to a type of IRA. Rather, it describes a strategy for stretching the tax-deferred compounding of your IRA assets beyond your lifetime to benefit multiple generations. Your heirs can choose to stretch out the distributions from your IRA across their lifetimes rather than withdraw the entire IRA balance in a lump sum after your death. Not all IRA custodians allow this flexible feature and certain conditions may apply.

How about naming a trust as beneficiary? Think about situations in which you want to maintain control over your assets. For example, if there are minor children or spendthrift heirs, it may be prudent to establish a trust and designate it as a contingent beneficiary. However, naming a trust as a beneficiary may impact how required minimum distributions are to be taken from your retirement assets.

Are there any problems with naming a charity as my beneficiary?

Few issues arise when a qualified charity is named as the only beneficiary of your retirement assets. However, if there are multiple beneficiaries and one of them is a charity, there could be negative tax issues for the heirs if the charity isn't paid its full share by Sept. 30 following the year of the IRA owner's death.

Take action now. Meet with your financial advisor.

If you haven't reviewed your financial situation lately, schedule time to meet with your financial advisor to go over your beneficiary designations. Also keep in mind that any time you experience a major life event (marriage, divorce, family death, birth of a child or grandchild) you should review your paperwork.