Thursday, July 22, 2010

Have You Ignored this Piece of Your Retirement Plan?

Do you keep up-to-date with your retirement plan? I’m speaking of plans like your 401(k) and IRA. Hopefully you’re on top of the investments in the accounts and not just tossing unopened, quarterly statements in a dresser drawer. There is, however, an aspect of these plans that even many savvy investors completely ignore after the accounts are opened. And that is: What happens to the money when they die. Will yours go to your spouse … an ex-spouse … your children? And if no one is named, it could end up in your estate. Then the state will hand it out as they see fit. That’s why the account beneficiary form is one of the most important forms you should review regularly. Particularly, if there has been a big change in your life. And the best part is that unless you need special legal advice, it doesn’t cost you a single penny to make changes. For instance, have you recently divorced, gotten married or both? Imagine the turmoil if your ex-spouse inherited your IRA instead of your new bride? I saw that happen to a friend on mine ... He went through a long and tumultuous divorce. Then got remarried. He changed his will and trust documents, but didn’t bother with his IRA, which was in the seven figure range. Apparently he though it was covered through the will or trust. Poor guy died. Guess who ended up with the IRA? His ex-wife and her children from a prior marriage! His new wife took the issue to court … and lost. What about children or grandchildren, any new ones? Or have any become compulsive shoppers and now have bill collectors hounding them day and night? You might have to set up special provisions for them, such as a spendthrift trust, so creditors can’t get at any of their inheritance. Have any of your beneficiaries died? If so, you should name replacements. Maybe now you have a favorite charity you’d like to help out. Updating your IRA beneficiary form to leaving it a piece of your IRA is a simple way to accomplish that. Do you have minor children named as beneficiaries? Who will receive the money on their behalf? Is that person still available? And suppose one of your adult children dies before you. Does your beneficiary form use the “per stirpes” language, which passes the deceased child’s portion to his or her children? Or will it be divided among your other children? You might want to double-check the documents. What about estate and income taxes. IRA and other retirement plan assets will be included in your taxable estate. And estate taxes are due nine months after you die. Have you discussed with your beneficiaries how to come up with the cash to pay those taxes? Income taxes can often be spread out over the beneficiary’s life expectancy. However, your beneficiaries must know how to take advantage of this provision. Otherwise, they could face a huge tax bill. Finally, does anyone know where you keep important papers, like your will and deed for your home? If so, you better put a copy of the beneficiary form there, too. Nothing is static in today’s world. Not the tax laws, not the investments inside your retirement accounts and certainly not your personal situation. So for your love ones’ sake, be sure to keep on top of your beneficiary designations. Best wishes, George

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