While the execution of a Will is one way to allocate of your assets, the reality is that most property passes to heirs through other, less formal means.

Many bank and investments accounts, as well as real estate, may have joint owners who take ownership automatically upon the death of the primary owner. Other banks and investment companies offer payable on death accounts that permit owners to name the person or people who will receive those assets when the owners die. Life insurance, of course, permits the owner to name beneficiaries.

All of these types of ownership and beneficiary designations permit these accounts and types of property to avoid probate, meaning that they will not be governed by the terms of a Will. When taking advantage of these simplified procedures, owners must be sure that the decisions they make are consistent with their overall estate plan.

It’s important to review beneficiary designations periodically to make sure that they are still correct. An out-of-date designation may leave property to an ex-spouse, to ex-partners, and to people who died before the owner. All of these can undermine an estate plan and leave a legacy of resentment that most people would prefer to avoid.

These concerns are magnified when dealing with retirement plans, such as IRAs, SEPs or 401(k) plans, because the choice of the beneficiary can have significant tax implications.

The following are some of the rules and concerns to consider when designating retirement account beneficiaries:

  • Name your spouse, usually. Surviving husbands and wives may roll over retirement plans inherited from their spouses into their own plans. This means that they can usually defer withdrawals until after they reach age 70 1/2 and take minimum distributions based on their age.
  • But not always. There are a few reasons you might not want to name your spouse, including the following:
    • He or she is incapacitated and can’t manage the account
    • Doing so would add to his or her taxable estate
    • You are in a second marriage and want the investments to benefit your first family
    • Your children need the money more than your spouse
  • Consider a trust. In some of the above circumstances, a trust can solve the problem by providing for management in the case of an incapacitated spouse and permitting assets to benefit a surviving spouse while being preserved for the next generation.

While a Will is important to name a personal representative to take charge of your estate or a guardian for minor children, a Will is only a small part of the picture. A comprehensive plan must include consideration of beneficiary designations, especially those for retirement plans.

If you or someone you know would like to create an estate plan, please contact our office.