Beneficiary designations on your retirement accounts (IRAs, employer retirement savings plans, etc.) can operate as an important and positive aspect of a well thought out estate plan. One of the main advantages of such beneficiary designations is that the funds do not have to pass through probate before your beneficiary receives them. Many potential pitfalls await, however, for the careless or the uninformed. Following is a list of some of the most common errors.

Not naming a beneficiary at all:

The consequences of failing to name a beneficiary work something like the consequences of dying without a will. Instead of the funds being distributed as you intended, they are distributed in accordance with the default provisions in the custodial agreement or document that governs your retirement plan — in other words, the fine print. Only if you are lucky will this distribution coincide with your intentions.

Failing to update your beneficiaries in response to significant life events:

Significant life events, such as marriage, or the death of one of your beneficiaries, can drastically affect the consequences of your beneficiary designation, your own intentions, or both. Even moving from an “equitable distribution” state to a ”community property” state can carry unintended consequences unless you adjust for them by changing your beneficiary designations. 

Naming your probate estate as beneficiary:

Naming your estate as the beneficiary of your retirement plan can delay the distribution of funds, and it can dramatically decrease your flexibility to the point that the tax consequences could be extremely significant. Naming your estate as beneficiary, for example, will likely prevent you from paying your beneficiaries piecemeal over a long period of time. When payment must be compressed, your beneficiaries can be kicked into a higher tax bracket.

Failing to name an alternate beneficiary:

What happens if one of your beneficiaries dies before you do, and you fail to update the beneficiary designation? Again, this works something like dying without a will — your retirement plan’s fine print will determine the distribution, which may or may not conform to your intentions. If you name an alternative beneficiary, you will not need to worry about this unless your alternate beneficiary predeceases you as well. 

Naming a trust as beneficiary:

Although naming a trust as the beneficiary of your IRA account is not a mistake as long as you do it right, it can complicate your estate plan by adding complexity and, sometimes, significant expense. Given the complexity of the law in this area, you should definitely consult an estate planning attorney before you name a trust as your beneficiary. 

Naming a charity as a co-beneficiary:

This can cause problems if you seek to distribute funds to another co-beneficiary who is an individual rather than an organization. You may wish to distribute funds gradually to this individual for tax purposes, and naming a charity as a co-beneficiary can interfere with your ability to do this.

Now is the Time to ActContact estate planning attorney Jose Lorenzo by calling (305) 999-5411, completing our online intake form, emailing us at jml@joselorenzolaw.com or visiting one of our offices in Coral Gables and Ft. Lauderdale. We accept clients throughout the state of Florida.