IRA Beneficiary Forms May Be More Important Than Your Will

Last Updated Jun 10, 2009 8:56 AM EDT

When you think of estate planning, most people think about getting their wills and trusts in order. But for many investors, their IRA or 401(k) beneficiary designation form will control the distribution of most of their assets.

Since many people accumulate the majority of their investment holdings through their employer plan, the 401(k) or IRA rollover account often holds the largest percentage of the family wealth. Yet, your will or trust provisions basically have no effect on how your retirement account assets are distributed.

You see, retirement plan assets are essentially transferred via the beneficiary designation form, not your will or trust provisions. So while you might have 30 pages of estate planning provisions in your trust, they won't help much with what may be your largest asset.

Often, the beneficiary form is neglected. People hastily fill them out when they open an IRA or enroll in a 401(k) and then never look at them again. In fact, I'll bet most people can't tell you what their beneficiary designation forms say. But when they pass away, that's the document that governs the distribution of all the assets in those plans.
  • There are also a number of tricky tax provisions that are unique to IRA accounts, such as the spousal rollover and inherited IRA options. I don't have the space to get into all of them here, but it's important to understand that the beneficiary form has both estate distribution and tax consequences attached to it.
  • Moreover, it's common for many people to include provisions in their wills and trusts for the periodic distribution of wealth to their kids or grandkids upon reaching certain ages, or to cover higher education expenses.
  • Well, if your beneficiary designation form lists your kids or grandkids individually, then the distribution will bypass your will or trust provisions. That may not be what you want.
There are ways to coordinate the beneficiary form and the trust provisions, but they require an attorney to help you design the strategy. You can forfeit valuable tax deferral options on the IRA if you name a trust directly as a beneficiary, so you need to be very careful in this area.

Bottom line: Beneficiary designation forms are estate planning documents and should be handled just as you handle your will or trust. Get legal guidance, and make sure the provisions of the beneficiary forms are coordinated with your overall goals.

As with all legal matters, consult your individual attorney prior prior to making any legal decisions.

Photo from Flickr, courtesy of iowa spirit walker, CC 2.0
  • Charlie Farrell

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