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When you start a new retirement plan at work or roll your money into an IRA account you will not only need to decide what investments to buy, but you also need to name a beneficiary for your account. If there is not a beneficiary named, your account will be distributed to your estate which could cause your heirs to have a much larger tax burden.

Many people do not realize the importance of their beneficiary designation. I was just reading about a court case where a man’s first wife passed away and he named his three children as beneficiaries of his 401(k) account at work. He eventually remarried and died just six weeks later. His new wife ended up inheriting the 401(k) even though his children were the intended beneficiaries. This is because a spouse is automatically the beneficiary in a workplace retirement account unless he/she has signed a waiver of spousal rights AND a new beneficiary form is completed.

This is a two step process. You cannot simply change the beneficiary form without the waiver and you cannot have the waiver signed without a new beneficiary form. This is also the case in a divorce. Your former spouse might indicate in the divorce decree that they are waiving their rights to your retirement account, but if you have not changed the beneficiary form as well, they can still inherit your assets.

Once you roll your account into an IRA, you are free to name anyone as a beneficiary and there is no need for spousal consent. It is good practice to review the beneficiary designations on your life insurance policies, annuities, and retirement accounts at work or held elsewhere on an annual basis. When you do this, make sure that they match the estate planning you have done. If you have a trust account, has your attorney recommended naming the trust as a primary or contingent beneficiary? If you have any questions about whether your accounts are set up properly, don’t hesitate to ask your advisor.

Christine L. Carleton, CFP®