When people get married, they can be surprised to learn that their IRA or pension does not automatically pay to their new spouse. Why not? The bank holding the IRA or pension funds will try to honor whatever the participant first chose when they opened the account. These accounts will always have a nominated beneficiary, or recipient, of the wealth. It is why I strongly recommend that once a person gets married, they review who they first chose as a beneficiary on the account.
The number one question I field when talking to people about their bank accounts is, “what should I do with my retirement account?” Sometimes this comes up during a consultation about the distribution clients want to make to their loved ones (who should get their inheritance.) Other times I hear this question after we have finalized the trust, but left the IRA or life insurance policy outside of the trust. Here is how I answer the inquiry:
Q: What do I do with my IRA, 401k, and other retirement accounts?
You should be very cautious about transferring the ownership of an individual retirement plan to your living trust. Instead, you should leave your spouse as the primary beneficiary and list the trust as a contingent beneficiary. This will help avoid probate. Your retirement plan administrator should provide confirmation of the change of beneficiaries in your records. If you do not have a spouse, your trust should be listed as the primary beneficiary, and the funds from the retirement account will be divided according to what you wrote in your trust.
Q: What if my IRA/401k/life insurance does not allow me to name the trust?
Sometimes financial institution won’t let a “trust” be a primary or contingent beneficiary on one of their accounts. If your financial advisors agrees that you cannot name your trust, you can name the first successor trustee but make sure after their name you put, “as Trustee of the {Title} Trust dated {when you signed}.” The idea is the funds would not go to your named successor trustee’s pocket, the funds from the account would go into your trust via the named successor trustee’s assistance. This should appease the “human being only as beneficiary” rule your financial institution may have made.
Q: I have life insurance policies, what do I do with those?
Contact your life insurance agent or broker and, as with the retirement accounts, name the trust as the beneficiary. Just like retirement accounts, life insurance policies cannot be owned by the trust; only the beneficiary provision should be changed.
Ultimately, it is important to consult with an estate planning attorney and financial advisor when deciding what is best for your situation. This is especially true if you own any property or have minor children. Estate planning can ensure you are utilizing your trust in a way that is most beneficial. Once these critical documents are prepared, you can rest assured knowing that your loved ones will not suffer the future stress of figuring out how to settling your affairs, manage your assets and debts, and make distributions to loved ones.
If you are interested in speaking with attorney Anna Howard regarding postnuptial chores or other estate planning inquiries, please click here to schedule your free 25 minute phone consultation.
