Beneficiaries: Tips & Troubles

When it comes to naming beneficiaries on your various accounts, there are some important things to pay attention to. I’ve certainly witnessed some pitfalls - unwanted surprises from heirs when what they thought was going to happen after their loved ones passed away was suddenly very different from their expectations. In my experience, 401k plan accounts seem to be the most often overlooked account that has consistently ended up with the wrong, or no, beneficiary listed. Two circumstances come to mind that end up most damaging to heirs

  1. 1 Leaving an ex-spouse or someone other than your current spouse as beneficiary. Under the federal rules with the Employee Retirement Income Security Act (ERISA,) 401k plans are to pay out the proceeds directly to the beneficiary. This trumps state law and can put many current spouses in a pickle if these beneficiary designations are left unchecked. This will often be something that recently married or divorced couples forget about updating
  2. 2 Leaving the beneficiary designation blank. This could happen if you auto enrolled in your company’s retirement plan and never logged into your plan’s online account to update your beneficiaries and verify your information. Also, under other instances where the plan switched to a new provider, or you were awarded some of your ex-spouse’s 401k balance as part of a divorce settlement. These all constitute new account setups and would require verification and designation of new beneficiaries. The default is no beneficiary listed.

    This leaves your estate as the inheritor of your 401k retirement account, and because the estate is not a living person, it’s not afforded the same distribution stretch-out or inheritance rules as afforded to a living person. In most cases this leaves the ultimate inheritance to be paid out all at once, or in the best case, over a few years rather than the more favorable 10-year timeline.

Per Stirpes vs. Per Capita

From time to time there is confusion as well over the per stirpes and per capita rules regarding listing heirs as beneficiaries. Per stirpes in Latin means branch. So, the lineal branch of that named beneficiary would inherit that beneficiary’s share should they predecease the person they’d be inheriting from. Therefore, their next of kin, would get the money. Per Capita is rather a split of that deceased beneficiary’s share amongst that first rung of beneficiaries, not to their next of kin. Per Stirpes is the most common form of beneficiary distribution. But it should be noted that spouses are not considered part of that distribution, only the next of kin, which typically is the deceased beneficiary’s children.

Estate Plan Importance

To have more control over how assets are protected, distributed, and managed after death, it’s perhaps the easiest and safest way to administer your wishes through a properly drafted estate plan. Typically naming a trust as beneficiary, as well as titling assets where appropriate in the name of the trust ensures everything goes where you want it to. Not only that, but it also can afford after-death protection and management control of these inheritances.

A quick example might be where a divorced father wants to leave everything to his two minor children. If he lists them as beneficiary on all his accounts, at least he’s got- ten something done. But he may not want the children’s mother to be the custodian of the minor’s accounts should he die prematurely. He may also not want them to have full unrestricted unprotected access to these funds at the age of majority. Naming a trust setup by his estate plan, would avoid these potentially troubling scenarios.

I hope these ideas help you to ensure your assets go to the people or places you care about in a way that affords the most protection and ensures that your wishes are carried out exactly as you intended

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Bradley Ruh Owner, Financial Adviser

This material is for general informational purposes only and was produced by Action Financial Strategies, LLC.

SMRU #5074996.1 Exp 11/7/24