Efficiently passing assets to heirs requires a bit know-how and attention. In most cases, your retirement fund along with other qualified plans (e.g. 401k) go to their specified beneficiaries immediately at your death; they don't have to be probated. These types of retirement accounts will not go to those stated in your will or living trust. Therefore, it is essential that your retirement fund beneficiary designations are accurate.
Case 1: A non-updated beneficiary on your retirement fund
You have pension accounts on which you originally assigned to a beneficiary who no longer is your choice (e.g. the grandson who is now a drug addict). If you don't change the beneficiary on the plan, your wayward grandson will get your pension to spend on the drug-du-jour. Alternatively, if you have re-married and do not change your plan beneficiary, then the initial beneficiary (the person you divorced) will inherit your retirement fund.
Situation 2: No beneficiary designation on your retirement fund
When you die and you have not named beneficiaries, your estate becomes the heir of your 'missing beneficiary' retirement fund. Unfortunately, that defeats most of the tax-sheltering benefits the any retirement fund may grant the successor. Your strategy suffers two undesirable scenarios:
1.Your retirement fund / pension plan will go through probate and be subject to unnecessary probate costs. And then
2. Your own beneficiaries (excluding your spouse) must disperse your retirement fund and pension plans or other qualified plans within five years of your death, (rather than take them over a longer period as would be beneficial)
The first scenario can tie up use of your pension plan / retirement fund in the probate process and add charges.
The second forces fast distribution of your retirement fund at ordinary income tax rates (as high as 35%) to your non-spouse beneficiary. This prevents the tax-sheltering of its appreciation over the 'stretch years' based on the beneficiary's remaining life expectancy.
Situation three: A non-authorized change of beneficiary on your retirement fund
If your spouse is assigned as beneficiary of your retirement benefits, you cannot modify the beneficiary with out her permission. (this applies to company retirement plans, not to IRAs). She should sign a written waiver if you want to name someone other than your spouse as beneficiary.
Are all your beneficiary designations on your pension plans, certified plans and IRAs consistent with your present wishes? Here's a way to make certain you don't get messed up having the belongings get less-than-optimal processing.
When you have a number of plans, you can set up a special trust to be beneficiary of all of your retirement funds. Then, once your life situation changes (marriage, divorce, new kids, grandchildren, and so on), you simply have to adjust the one document, the trust. At death, all of your pension plans and other retirement plan or retirement fund assets will 'pour' in to the trust after which get distributed as you've stipulated there. Brilliant!
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