By Howard S. Kirkpatrick
IRAs and 401(k)s are amazing. They combine the incredible power of tax-deferral with the miracle of compounding interest, which Albert Einstein called “the greatest mathematical discovery of all time.” Together, tax-deferral and compounding have turned these retirement tools into one of the largest assets of most estates — topped only by the family home. But what happens to all that accumulated money when you die? Should you be worried?
Most people name a beneficiary when they open the account and designate a spouse or children. Therefore, when they die, the money goes to a spouse or the children. Sounds easy, right? (Not so fast). What if your beneficiary was your spouse when you filled out the form years ago, but since then, you divorced and died? You never changed the form. Your kids will be in for the shock of their lives when your “ex-spouse” gets a windfall and inherits all the money in your IRA.
But wait. Your will clearly says that your IRA goes to your kids. Too bad your will has nothing to do with your 401(k) and is just about as useless when it comes to your IRAs. Your lawyer should have known that.
Here’s another example: You name your son beneficiary of your IRA. He dies and you never named a backup in case something happened to him. Who will receive your $300,000 IRA when you die? Will it go to his wife, your daughter-in-law? Will it go to your grandchildren? Will it go to the state? Will it go to your 85-year-old brother? It depends. More likely, the Probate Court will decide for you. Eventually, somebody will receive your money, it just may not be who you would have chosen.
But you thought IRAs and 401(k)s avoid probate? Again, it depends. In the scenario above, your family will visit the Probate Court and participate in the headaches and legal red tape inherent in the system. The same result occurs if your beneficiary is incompetent at the time of your death.
So, what’s the solution? Update your IRA and 401(k) beneficiary designation forms on a regular basis — every few years or immediately after a beneficiary dies or becomes incompetent. These accounts hold far too much money to be careless. If you can’t put your hands on your beneficiary designation within 10 minutes or at least be able to say who your beneficiaries are off the top of your head, you are playing with fire. Remember, just because you have a will or even a trust, does not mean you’ve dealt with your IRA or 401(k) beneficiary.
Do yourself a favor, call your IRA custodian (Fidelity, Ameriprise, etc.) and ask for your most recent beneficiary designation form so you can review it and make sure the people you picked are still who you want to receive your money. If you have a 401(k), call your employer or former employer’s HR department or 401(k) record keeper and ask for the same form. It’s free and takes just a few minutes of your time. But not doing so could cost your grandchildren their college fund.
Attorney Howard S. Kirkpatrick practices estate planning and elder law and is the principal at the Law Offices of Howard S. Kirkpatrick with offices in Grafton and Northampton, Mass. He can be reached at 508-340-3134 or at his website www.attorneyhk.com/.