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Retirement Account Mistakes Can Bring Estate Plan Down

12/14/2022 | Heirs & Beneficiaries

Because retirement accounts are often a significant portion of people’s estates, it is important for folks to understand the importance of correctly managing these accounts in the context of estate planning. Because handling retirement accounts requires an understanding not only of IRS regulations, but also Treasury Department regulations, doing so is not necessarily an easy process.

When it comes to retirement accounts, there are certain common mistakes people make that can put their accounts at risk. One of these oversights concerns naming beneficiaries. Experts in the industry say that many people forget to name a beneficiary for their retirement plan, or forget to change the beneficiary designation after a divorce. These are basic things that a good estate planner will be sure to check out and address.

Divorce is an important red flag when it comes to estate planning in general and for retirement accounts in particular. It is not uncommon for folks to forget to change beneficiaries or to name the new spouse without ensuring that their own children from their first marriage will receive some of the proceeds.

Mistakes can arise also in the area of who to give the retirement account to. One thing to consider, for those who want to give to charities as part of their estate plan, is that charities do not pay income tax on retirement accounts and a charitable deduction is allowed for such a gift. If this is the case, it may be worth it to consider whether there are other ways to provide for one’s children than giving them the retirement account. Doing so can have tax advantages.

Another oversight that can occur is accidentally arranging things to that all retirement money goes to one’s minor children immediately. This can happen even in cases where a trust is created to ensure that assets are distributed to the children over time. If one names the children as the primary beneficiaries of the retirement account, though, the assets go directly to them. One way around this is to name the trust as beneficiary.

In working with retirement accounts in estate planning, it can be greatly helpful to work not only with an attorney but also a financial planner.


Source: Wall Street Journal, “Minding Retirement Accounts in Estate Plans,” Arden Dale, July 30, 2013.