The age-old question: what happens to us when we die?  I’d be lying if I said I had any sort of spiritual answer for you.  I can; however, help shed some light on what happens to your worldly possessions at death and how you can better prepare your estate plan, ensuring that the loved ones you wish to inherit your assets end up being the same as the people who do inherit your assets.

What Assets to Designate

Upon death, assets are passed to survivors in three ways;

  1. beneficiary designation (i.e IRA’s or insurance policies),
  2. by operation of law (i.e joint ownership), and 3) through probate (your Will).

If you’ve ever had a Will drafted, you may be familiar with the terms “probate” and “non-probate.” Probate assets are assets that are owned individually and must pass through the court (through the interpretation of an executed Will or through intestate succession to a living beneficiary).  So essentially, a Will informs the court system how to distribute assets held solely in your name or your share of a joint asset (tenants in common), such as a checking/savings account, your personal property, or an investment account, directly to the person or persons you’ve named in the document.  You may think to yourself, “great, I’ve already executed a Will naming my spouse/best friend/child/charity as the recipient of my estate; mission accomplished.”  However, you’d be celebrating a little early as you may have forgotten about your non-probate assets.

Non-probate assets are a little easier to recognize, as they require the designation of a beneficiary when you open the account.  At death, these assets will pass directly to the beneficiary of the account, superseding anything directed in your will. Simple enough, right?  So I’ll ask again, what kind of assets pass through beneficiary designation?  Retirement plans, like your 401(k), 403(b) pension, and defined benefit plans, individual retirement accounts (IRAs) or any variation of IRAs (SEP, Roth, Rollover, Inherited), and life insurance policies pass through a beneficiary designation. For simplicity’s sake, let’s focus on your retirement assets (employer-sponsored plans, IRAs, etc.).

When was the last time you logged into your retirement account online and checked your beneficiary designation?  Was it when you started your job?  When you got married? When you had children?  For many of us, myself included, it has been far too long since we’ve revisited our beneficiary designations and how they fit into our current estate plans.

When to Review Your Designations

Think back to your first few weeks of work, when you filled out a stack of forms.  You undoubtedly had to fill out a Federal Form W-4.  You likely chose a health insurance plan and signed up for your company’s retirement plan and/or elected your salary deferral.  You may not remember, but you also designated a beneficiary for your retirement account.  As time passed, you may have changed jobs and repeated the steps above. Maybe you opened up a Roth IRA, or a Rollover IRA (for that 401(k) from your old employer) and designated beneficiaries in those accounts.  Have you left a string of outdated beneficiaries in your wake? Have you checked to ensure that you aren’t still leaving your retirement account to a former spouse, a family member you’re no longer on good terms with, or that you’ve added a child or grandchild (where applicable)?

It is important to review your beneficiary designations at major life events, like marriage, the birth of a child, divorce, and even death of a loved one even though these times are generally the most stressful and busy.  At these points of reflection, you have the opportunity to reassess the people you value the most and ensure those people are taken care of appropriately.

Outside of these life events, it is also important to reflect on your beneficiary designations on a periodic basis.  A good practice may be to set a recurring appointment for January every year and spend half an hour reviewing your accounts and how they funnel through an estate plan.  If you have yet to create a Will or created one a long time ago, make it your resolution this year to meet with a qualified attorney and cross that item off the to-do list, and when you are there, make sure to bring up your 401(k) or IRA beneficiaries.  Your financial advisor can help make recommendations based on your relationship and a good attorney should accommodate what you’ve already done or advise you to make changes.

So this year, when you are with your family and loved ones, reflect on who you would like to inherit your retirement account and other non-probate assets and make it your resolution to stay on top of your estate plan.

Stay tuned for my upcoming post about who makes a good beneficiary and who does not.

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