Avert Potential Disaster by Regularly Checking Beneficiary Designations

One of the most important considerations for IRAs or other retirement plans is to make sure the proper beneficiaries are designated. However, this step alone isn't sufficient estate planning as it pertains to your IRAs. Regular review of your designations is required to make sure your assets are still set to be distributed how you want.

Checking Beneficiaries As life events such as marriage, divorce and death occur, one of the first things you should do is to review and update your financial account information. Examples include:

• Updating your address
• Establishing joint or separate bank accounts
• Reviewing beneficiary designations on your retirement accounts

If no beneficiary is listed on your IRA or no named beneficiary survives you, your estate may end up as the "default" beneficiary of the account after you die. This typically produces the worst possible result in terms of taxes and other issues. Required post-death distributions from the account will be made at the fastest rate possible, potentially increasing the total income taxes due. Obviously, the more rapidly funds are distributed, the less time they have to grow tax free. Further, the funds will have to go through probate before being distributed.

What Can Happen If you die before your required beginning distribution date (which is April 1 of the year following running age 70½) and your estate becomes the default beneficiary, the IRA must be fully distributed within five years and have all income taxes paid.

If the IRA owner dies after the required beginning date, the beneficiaries (after the money gets through probate) may continue to stretch their distributions over the remaining life expectancy of the IRA owner prior to the time of death.

Keeping Track A good best practice would be to create a spreadsheet of all of your retirement accounts and list the primary and contingent beneficiaries on each. Every year (perhaps when you file your tax return or meet with your financial advisor), take a few minutes to check that spreadsheet and make any necessary revisions. This could end up being perhaps the least expensive, least time consuming and most important bit of estate planning you'll do.

Photo courtesy of Dave Dugdale on Flickr and www.learningdslrvideo.com.
Follow the series:

• How to Properly Name IRA Beneficiaries
• Avert Potential Disaster by Regularly Checking Beneficiary Designations
• Beneficiaries Need to Plan, Too

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