Your Will May Not Control Where All Your Money Goes

Your Will May Not Control Where All Your Money Goes

 

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You finally get the estate documents done.
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You meet with the attorney. You sign the will. Maybe you create a trust. Everything goes into a nice folder that you put somewhere safe.
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Done.
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Except maybe not.
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Because sitting inside an old 401(k), IRA, or life insurance policy may be a beneficiary form you filled out 10 or 20 years ago.
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And that little form may matter more than you think.
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One of the biggest misconceptions around estate planning is that the will controls everything.
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It does not necessarily work that way.
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Retirement accounts have their own beneficiary procedures. The IRS defines a beneficiary as the person or entity designated to receive the retirement account after the owner dies, and some retirement plans have additional rules around who may be named.
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Life insurance works through beneficiary designations as well. The National Association of Insurance Commissioners specifically recommends reviewing policies after major life events and checking beneficiary information regularly.
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A lot can happen between the day you open a retirement account and the day someone eventually inherits it.

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You get married.

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You have children.

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You get divorced.

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You remarry.

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A beneficiary dies.
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A child becomes an adult.
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You leave three employers and collect three different retirement plans along the way.
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Your estate documents get updated.
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The old 401(k) does not.
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That is how gaps happen.
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Divorce deserves particular attention because employer retirement plans can be subject to federal rules involving spouses, former spouses, and Qualified Domestic Relations Orders, or QDROs. The specifics matter, and simply assuming the estate documents fixed everything can be a mistake.
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This is not exciting financial planning.
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There is no market forecast involved. No investment strategy. No chart.
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But it matters.
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There is another layer people often miss.
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Beneficiary planning is not only an estate-planning decision.
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It can be a tax decision too.
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Inherited retirement accounts have different distribution rules depending on who inherits the money. A surviving spouse, for example, generally has options that may not be available to a non-spouse beneficiary.
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Many non-spouse designated beneficiaries are subject to rules requiring the inherited account to be emptied within 10 years, while spouses and certain other eligible beneficiaries may qualify for different treatment. Taxable distributions from inherited pre-tax retirement accounts generally become taxable income to the beneficiary when received.
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	Spouse Beneficiary	Non-Spouse Beneficiary
Distribution options	Generally broader options available	Typically more limited
Account emptying timeline	May qualify for different treatment	Often subject to a 10-year rule
Taxable pre-tax distributions	Taxable as income when received	Taxable as income when received

 

 

 

 

 

 

Source: Internal Revenue Service, Retirement Topics — Beneficiary. Rules vary by account type and individual circumstances.
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That means the question is not simply:

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It may also be:
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Those are different questions.

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And they are another reason estate planning, financial planning, and tax planning should talk to each other.

This does not need to become a six-month project.

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Pull together the accounts that may have beneficiary designations and review them.

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Start with:

•  401(k)s and other employer retirement plans

•  Traditional and Roth IRAs

•  Life insurance policies

•  Any other accounts with beneficiary, transfer-on-death, or payable-on-death instructions

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Then check the basics.

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Who is the primary beneficiary?

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Is there a contingent beneficiary?

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Are the percentages correct?

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Have there been marriages, divorces, births, deaths, or other major changes since you last looked?

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And most importantly, does everything line up with the estate plan you think you have?

This is one of those areas where having separate professionals who never communicate creates unnecessary risk.

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Your attorney may draft the estate documents.

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Your accountant may understand the tax implications.

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Your financial advisor may know where all the retirement and investment accounts are.

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Someone still has to connect the dots.

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That is the part that matters.

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Because a financial plan is not just about what happens to your money while you are here.

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It should also be clear about what happens to it when you are not.

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Beneficiary planning is a good example of how much more there may be to look at beyond any single document or return. Sometimes one simple review uncovers questions worth addressing before they become someone else’s problem.

Sources

Internal Revenue Service, Retirement Topics — Beneficiary.  https://www.irs.gov/retirement-plans/retirement-topics-beneficiary

U.S. Department of Labor, Qualified Domestic Relations Orders Overview.  https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/qdros

National Association of Insurance Commissioners, What to Know About Life Insurance Beneficiaries.  https://content.naic.org/consumer/life-insurance-beneficiaries.htm

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