Before It's Too Late ~ Eric Gullotta

Eric Gullotta Eric S. Gullotta, JD, CPA, MS (Tax) specialies in estate planning and taxation law. His office is located at 232 West Napa Street, Suite A, in Sonoma. Contact him at 938.7234 or visit Gullottalaw.com.

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Keep your beneficiary designations current

Posted on July 22, 2015 by Eric Gullotta

As a reminder, “Custodial” type accounts are IRAs (individual retirement accounts), ROTH IRA, 401(k), etc. and even life insurance, annuities and pensions. When you create these types of accounts you are required to sign a contract spelling out the terms of the account and often (but not always) prompted to create beneficiary designations.

The reason they are referred to as “custodial” accounts is because of this contract. This contract is very important. Most people never realize they even have a contract or what it says. One part of the agreement that many people do know about is the section that spells out what happens to the money in the account when you die. This is the section that lists your beneficiaries – usually primary (first in line) and contingent (second in line).

It is also this contract that allows custodial accounts to avoid probate. By spelling out, very clearly, what happens to the account when you die, you and the financial institution holding the account can avoid probate and distribute the funds directly to your beneficiaries.
Ok, background complete. Now the good stuff.

When you create an estate plan you name beneficiaries. When you create custodial accounts you also name beneficiaries. What if they are different? What if they change? What if they aren’t correct?

Time goes by, families change, lives changes, relationships change. People get married, divorced, have kids, have grandkids and are usually good about updating their estate plan – but don’t usually revisit their beneficiary designations. This is surprising considering many people have significant wealth in retirement type accounts.

Other than beneficiary designations just being outdated or done incorrectly, they can sometimes even be harmful to your loved ones. Consider this scenario; when you created your 401(k) you named your spouse as primary beneficiary and your two kids as secondary beneficiaries. The kids were young still in grade school. Now fast-forward to your kids in their late teens, early twenties. One of your children is showing signs of drug or alcohol abuse or a propensity to spend like a sailor on leave. Your estate plan has provisions so that the kids don’t get full control of the money until a certain age (usually 25 or 30) – but what about your 401(k)?

Unless specified, your contingent beneficiaries (your kids) will get your 401(k) immediately if they are over the age of 18. That means that your children will get potentially $100,000s when they are in the midst of drug and alcohol issues. Consider using a trust to funnel the custodial account proceeds through to restrict how your children get this money. A good estate planning attorney can walk you through this.

A common mistake we see in the office is just filling out the form wrong. On many forms, people incorrectly list their contingent beneficiaries (usually children) one AFTER the other and not together. This means one of your kids gets all the money, which is usually not what you wanted.

The point is this – don’t ignore your beneficiary designations. They may be outdated, inconsistent with your estate plan or just wrong. You can request your beneficiary designations from the company holding your account. Take this with you when you prepare your estate plan or provide a copy to your estate planning attorney so they can review them and be sure they fulfill your intentions. You can be too early, but you can’t be too late!



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