If you have a will (and we hope you do), chances are you’ve spent long hours carefully considering exactly how your estate should be distributed among your children or other heirs. But if you have a 401(k) or an IRA, chances are you spent about five seconds deciding who your beneficiary should be. What’s more, you’re likely to have done this 10, 20 or even 30 years ago.
The Out-of-Date Beneficiaries Problem
Conflicts like these have become a thornier issue as more people concentrate more of their wealth in their retirement savings plans, and they’re the subject of a new study by Stewart Sterk and Melanie B. Leslie of the Benjamin N. Cardozo School of Law at Yeshiva University, published in the most recent issue of the New York University Law Review.
And many people tackle this task early in their careers, when spouses and kids have yet to enter the picture; they’ll typically designate their parents, siblings or nieces and nephews as their beneficiaries. (Before I got married, my impressive four-figure IRA was earmarked for my younger brother.)
The Estate Planning Mistake Many People Make
As people set up their estate plans, many wrongly assume that their wills will determine what happens to their retirement accounts. In fact, the beneficiary designation usually trumps the will, and heirs who try to stake a claim to 401(k) or IRA assets that have been designated to someone else face costly litigation with no certainty of success.
Flaws in the System
He also notes that many retirement-plan administrators don’t allow account holders to designate more than two beneficiaries — a potentially significant hassle for some larger families.
Matthew Heimer covers retirement for MarketWatch and edits the Encore blog. Follow him on Twitter @MatthewHeimer.
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