This article specifically discusses IRA and 401(k) accounts, but the lesson generally applies to all financial accounts that allow for payment on death beneficiaries to be designated by the account holder.
Beneficiary designations are great for some circumstances and terrible for others.
Beneficiary designations are strong transfer mechanisms. Accounts with beneficiary designations do not have to be administered through a probate proceeding, and they are not generally part of a trust administration either. When an account holder dies with a beneficiary designation in place, the financial institution will want to verify the death and confirm that the beneficiary listed is legitimate. Once that due diligence is complete, the institution will transfer the funds. Done.
The main problem with beneficiary designations is the lack of control. Even if you execute an estate plan (will or trust) that includes additional provisions for distributions to certain individuals, those provisions will not be integrated into a beneficiary designation.
This comes into dramatic focus when we look at distributions to minor children.
Children cannot hold property; therefore, someone needs to hold it on their behalf. When a property is to be distributed to a minor from a financial account or probate estate a guardianship proceeding will likely be needed.
A guardianship proceeding is court-supervised through the probate court. There are two types of guardianship proceeding, guardian of the person and guardian of the estate. The purpose of a guardian of the person is to address the physical custody, care, and well-being of the child. The purpose of the guardian of the estate is to protect the child’s financial interest. Here we are discussing a guardianship of the estate which oversees the IRA or 401(k) property. This proceeding will be necessary even if the child’s parent is alive and capable of holding the property. In these cases, the parent will often serve as the guardian, but the property will need to be held in a blocked account and require the court’s permission to access the property. As you can imagine, this is a huge hassle for the parent if there is a need for the funds to pay for the needs of the child.
The best way to avoid this headache is to name your spouse as the beneficiary of your IRA or 401(k) and then name your revocable trust as the contingent beneficiary. If you have no spouse, that is fine too, just name your Trust as the primary beneficiary. Of course, this is all dependent upon having a revocable trust in place to receive these assets, so please make an appointment with Tresp Law, APC to ensure your trust is properly created and reflects your current wishes.
