Your Beneficiary Form > Your Will
Three consecutive weeks talking about estate planning – do I still have your attention, or is it long gone? I wouldn’t blame you if it was the latter. Hang it there!
We’ve discussed the important of a will in determining who gets your assets when you die. However, your 401(k)* or IRA, along with other assets like life insurance and annuities, often have a Beneficiary Form. This form will take precedence over what your will says - hence the subject line. With the growth of these employer retirement plans over the past 30 years, it is not unusual for 50-90% of someone’s net worth to be tied up in these accounts. Because of that, often the beneficiary form is the most crucial estate planning document - and with that comes the opportunity for costly mistakes.
I have seen my fair share of mistakes made on beneficiary forms, including…
(1) Having no beneficiary at all, in some cases requiring that the assets be distributed and taxable immediately.
(2) Having an ex-spouse listed as the beneficiary even though their will was updated with the current spouse.
(3) Having a trust as the beneficiary even though the trust isn’t set up to receive retirement accounts.
(4) Having a sibling as a beneficiary from an account set up before they were married.
There are lots of ways you can get into trouble here.
A few action items to prevent this for yourself include -
(1) Making sure your beneficiary form is filled out in the first place!
(2) Reviewing if the beneficiary form will distribute assets in the same way your will does (if that is what you want).
(3) Making sure you have contingent beneficiaries, especially if you have kids.
(4) Paying attention to distribution method – per stirpes vs. pro rata
a. Per Stirpes generally means that if you have a beneficiary that predeceases you, their share would go to their own family lineage.
b. Pro Rata generally means that if you have a beneficiary that predeceases you, their share would go to the other beneficiaries you listed on the form.
If you would like to review the other 4 key estate planning documents, you can use the links below.
Revocable Living Trust (optional)
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.
* There are many other types of employer plans, such as 401(k), 403(b), TSP, 401(a), 457, etc.