Potential Perils of Retirement Account Beneficiary Forms: Why Disinheriting Your Grandkids Might Not Be as Easy as You Think
In the realm of estate planning, naming a trust as the beneficiary of retirement accounts has become a popular strategy to avoid probate and ensure efficient management of assets after death.
Many clients name their spouse as the primary beneficiary and their children as contingent beneficiaries, with the focus on avoiding probate. However, beneficiary designation forms for retirement accounts are often treated as an afterthought. This oversight can lead to unintended consequences, especially when it comes to multigenerational planning.
Boilerplate forms provided by financial institutions do not handle multigenerational planning well. If a financial institution's beneficiary form defaults to a per capita distribution and fails to provide space to name grandchildren as contingent beneficiaries, or fails to include a proper per stirpes election, unintentional disinheritance can occur. For instance, if a child dies before the account owner, grandchildren can be unintentionally excluded from inheritance.
To address these issues, naming a trust as the beneficiary can be a solution. This strategy offers several advantages. For one, it ensures that pension assets are efficiently managed and protected according to the grantor’s wishes after death. Trusts can also protect assets from divorce, creditors, or lawsuits, and they can be customised to provide lifetime benefits to a child, with the remainder to grandchildren.
Trusts can manage distributions to minors or financially irresponsible heirs, and they can include special needs provisions without affecting public benefits. If using an accumulation trust, plan for higher income tax exposure and structure the trust to qualify under post-SECURE Act rules or start converting to after-tax accounts.
A conduit trust passes required minimum distributions (RMDs) directly to the individual beneficiary each year, preserving stretch options under SECURE Act exceptions. However, it's important to note that a trust must be a valid see-through trust to qualify as a "designated beneficiary" under IRC Section 401(a)(9).
To ensure a smooth process, attorneys should coordinate with the institution before death, submit trust documentation well in advance, draft the trust to clearly satisfy the see-through rules, and provide model language on the beneficiary designation form that matches the trust name and date precisely.
It's also crucial to review and update both the trust and beneficiary designations regularly, especially after births, deaths, or divorces. By taking these steps, individuals can ensure that their retirement accounts are managed according to their wishes, providing a secure financial future for their loved ones.
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