A Guide for Retirement Plan Beneficiaries

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Many people set up their wills and designate their heirs. But what about any retirement accounts? These are different from a will and should be addressed separately.

Naming a beneficiary for a retirement account is simple but is often overlooked. This is especially true of younger or single individuals. How do you name a beneficiary, and what are the different types?

Beneficiary Designation Different for Retirement Accounts

The beneficiary designation for your retirement accounts has nothing to do with the beneficiaries in your will. Your retirement account beneficiary designations control who receives your 401(k), individual retirement account (IRA), and any other retirement assets.

You can designate someone in the will, but if they’re not a beneficiary designation on the retirement asset, the plan custodian will defer to the beneficiary listed on the asset.

That’s why it’s essential to keep your beneficiary designations current.

Primary and Contingent Beneficiaries

Primary beneficiaries are entitled to receive all undistributed assets in the account following your death. If a beneficiary predeceases you, their share of your account will be divided among the remaining primary beneficiaries.

A contingent beneficiary is entitled to receive the undistributed assets if there are no surviving primary beneficiaries at your death. Unless you designate them differently, the contingent beneficiaries will share in the undistributed assets. For example, you specify 70 percent to one and 30 percent to another.

Failing to have a contingent beneficiary is the biggest mistake people make. Ensure the people you want to receive your assets by designating a contingent beneficiary.

Spouse as Primary Beneficiary

It is presumed your spouse will be the primary beneficiary. For a 401(k), unless you designate otherwise, the spouse is the primary beneficiary. If you don’t want your spouse to be the primary beneficiary, they must agree in writing.

In community property states, an IRA is treated in the same manner. A spouse must be the primary beneficiary; only a written agreement changes that stipulation. If you don’t live in a community property state, you can designate anyone as a beneficiary to an IRA.

A Trust as a Beneficiary

Setting a trust up and naming it as a beneficiary gives you more control. Once you pass, the trust administrator distributes the assets according to the trust’s directions.

Trusts are more complicated, and you should consult with a qualified estate attorney.

List Beneficiaries Clearly and Correctly

The more specific you are when listing beneficiaries, the better. Don’t group beneficiaries; name them. For example, don’t say “divide among my children”; name each child. Make sure you use their full name—no nicknames.

If you want to divide your retirement accounts equally, list the individuals. This is the case even if they’re your children. Write down:

• son’s name—25 percent
• son’s name—25 percent
• daughter’s name—25 percent
• daughter’s name—25 percent

This will eliminate any confusion or angst among the survivors. If you want to ensure each child inherits equally, even if one has passed, list the distribution as per strirpes. This means your children’s children will divide their parents’ share.

The surviving grandchildren will split their parents’ amount.

List Beneficiaries Separately

Ensure you list everyone you want to inherit a share of your retirement assets. It’s not a good idea to list one child on each account with the idea that they will share with the rest of your children.

List every beneficiary separately.

Designating a Pet

A pet cannot be your beneficiary. But you can set up a trust or leave an amount under your last will and testament. In your will or trust you can name someone as the “pet trust” trustee. That person will oversee using the funds to care for your pet.

Designating a Minor or Special Needs Individual

A minor can only inherit directly once they reach the age of majority. It’s advisable to set up a trust for the minor. The alternative is that a probate court will appoint a conservator for the assets.

If you’re naming a person with special needs, the assets from your estate might interfere with the person receiving government assistance. In fact, depending on the amount, it could disqualify them.

The best course of action is to set up a trust.

Continuously Review Beneficiary Designations

Life has a way of changing finances and relationships. Review your beneficiary designations yearly. Even if you think you’ve covered it in your will, it doesn’t matter when it comes to your retirement accounts.

Your beneficiary designations supersede what you put in your will. If you have a life-changing event like a birth, divorce, or death, ensure your beneficiary designations are updated. Make it a point to review all beneficiaries yearly. Don’t set it and forget it.

It’s a good idea to have an estate attorney review your designations.

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