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Passing Your Retirement Account to Beneficiaries

February 23

Understanding How to Pass Retirement Accounts to Beneficiaries

Written by Thomas Upchurch

Retirement accounts are often among an individual’s most valuable assets—particularly for those who started saving early and have been responsible about making regular contributions throughout their careers. It’s important not to overlook these assets in estate planning, since they generally pass to beneficiaries differently than other assets.

Listed Beneficiaries on Retirement Accounts

Although the specifics of each individual plan may differ, qualified retirement accounts such as 401(k) and IRA accounts are typically passed through beneficiaries designated by the account holder. Rather than passing through the account holder’s estate, most retirement accounts will pass directly to the chosen beneficiary, much in the same way that life insurance proceeds are paid directly to the beneficiary.

There are two basic ways to route retirement accounts to beneficiaries: listing the specific beneficiary or beneficiaries on the account, or listing a trust as beneficiary.

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Direct Distribution to Beneficiaries

The most common approach is to simply list the person the account holder would like to receive the asset as a direct beneficiary. This is usually accomplished by filling out a short form when setting up the account. If the account holder is married, the spouse is automatically designated the beneficiary under federal law, unless he or she has signed a waiver.

This method of designating a beneficiary is popular because it is quick, easy, and free. However, it also requires management on the part of the account holder. For example, if a married person whose spouse is his or her retirement account beneficiary, the account holder will have to remember to change the beneficiary with the account administrator.

That’s a fairly simple matter if all he or she has to manage is a single retirement account. However, if there are other beneficiary-directed assets or rights of survivorship in play, then listing a trust as beneficiary may simplify the process and help ensure that nothing slips through the cracks.

Living Trust as Retirement Account Beneficiary

In place of a person, an account holder may list a trust as the beneficiary of the retirement account. Setting up a living trust to route assets like retirement accounts into serves two purposes.

First, listing a trust as a beneficiary of various retirement accounts, life insurance policies, and other assets that allow for this structure can streamline the process of updating beneficiaries and help ensure that nothing is overlooked. If the trust is the beneficiary for all beneficiary-directed and right-of-survivorship assets, then a change in beneficiaries will require only one update—to the trust.

Second, distributing retirement accounts to a trust allows for more complicated distribution schemes, if the account holder wishes to split up the account among multiple beneficiaries or restrict the timing of the payout or the purposes for which the funds can be distributed.

Educate Yourself Before Determining How to Distribute Retirement Accounts

Management of retirement accounts can be an important aspect of your estate plan, and requires that you take the time to educate yourself before acting. Some key considerations include:

  • Differences in tax treatment of accounts depending on the beneficiary and the structuring of the distribution
  • Specific terms and restrictions of an employer-sponsored retirement plan
  • The pros and cons of listing a direct beneficiary versus a trust in your particular circumstances

An experienced estate planning attorney can be the best source of information and advice about how best to protect your beneficiaries when distributing retirement accounts. Make planning for your retirement benefits an integral part of your estate plan.