Why Are Beneficiary Forms Important?

Beneficiary forms
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Neither your last will nor your revocable trust supersedes your beneficiary forms.

Do you have a retirement account?

If yes, you have likely seen a beneficiary designation form.

Retirement accounts are one of several types of assets passed to heirs through beneficiary designations.

Many people simply fill out the form upon the creation of the account and never look at it again.

According to a recent The Street article titled “Secure your IRA—Review Your Beneficiary Forms Now,” doing so could cause significant estate planning problems.

You should review your beneficiary forms regularly.
Keep your beneficiary forms with the rest of your estate planning documents.

How so?

Relationships and laws will likely both change over your lifetime.

Consider the SECURE Act.

This legislation carried the most significant changes to retirement law in decades.

If you have not yet reviewed your beneficiary forms since it went into effect on January 1, 2020, you should do so now.

Most people keep their estate planning documents and their life insurance policies together in a secure location.

Unfortunately, they often neglect to do the same with their beneficiary forms.

If this is you, you will need to track them down.


Where do you start?

Begin by cataloging all of your IRAs, 401(k)s, 403(b)s, and any tax deferred savings accounts.

All of these would have been impacted by the SECURE Act.

Once you have your list, request copies of your beneficiary forms from the custodial institutions.

You may be able to access them online.

Regardless, you should engage the assistance of your financial advisor.

When you have received these current forms, review them for any errors or changes.

Unfortunately, it is all too common for people to not update these forms when family dynamics have changed.

The most common life event requiring a top to bottom review is the death of a spouse.

Do not forget the impact of another common life event – divorce.

Without updating the forms, an ex-spouse could receive the payout of your retirement savings when you die.

At this point, it would be too late to take action.


As you review the beneficiary forms, you will want to consider whether the SECURE Act impacted your plan.

How might it have done so?

The SECURE Act created classes of beneficiaries with specific distribution rules for each.

These rules apply to the retirement accounts of any person who dies after December 31, 2019.

Did you name a trust as a beneficiary of your tax-deferred retirement plan?

If yes, then consider revisiting your plan with your estate planning attorney and make any necessary adjustments.

The SECURE Act also eliminated the so-called “Stretch” IRA planning for beneficiaries who are not the surviving spouse.

What does this mean?

Non-spousal heirs will be required to empty any inherited accounts within ten years of the death of the original owner.

They will no longer be able to stretch out distributions through their own respective lifetimes.

What happens if the beneficiaries fail take withdrawals within the required time frame?

They may face a penalty of 50 percent on the non-distributed amount plus taxes.

Discuss with your estate planning attorney how to best utilize your beneficiary forms within your comprehensive estate plan to optimize your distribution of assets.

Because assets with beneficiary designations pass outside of your last will or revocable living trust, they will be distributed to those named on the form rather than those listed under your estate planning legal instruments.

What happens if no beneficiary is named on the form?

In most instances, the asset will be paid to your a”estate” by default.

If this happens, the account may need to be fully drained through distributions within five years rather than the 10 years allowed for non-spousal beneficiaries under the SECURE Act.

Is all lost if there is no living designated beneficiary?

Likely so.

However, I was just reading in the retirement benefits planning “bible” (“Life & Estate Planning for Retirement Benefits” by Natalie Choate) that you should contact the custodial institution for the retirement plan to determine whether the “default” beneficiaries are the “issue” of the participant owner rather that his or her “estate”.

This distinction could make a difference, especially when it comes to avoiding “probate” to transfer the retirement plan proceeds, and it may even double the default mandatory distribution window from five years to ten years.

Either way, it is worth the question running up the custodial institution flagpole.

Working in close coordination with an experienced financial advisor, CPA, and estate planning attorney is the best way to ensure your beneficiary forms are aligned with current laws and your estate planning goals.

Even more important, this vigilance will help ensure that your beneficiary forms remain aligned going forward.

It never hurts to have multiple “advisor” eyes on all of the moving parts of your financial, tax, and estate planning.

Reference: The Street (Dec. 28, 2020) “Secure your IRA—Review Your Beneficiary Forms Now”

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