Coordinate your IRA and trust
One often overlooked area of estate planning is your custodial accounts: individual retirement accounts (IRAs); 401(k)s, etc.; life insurance; annuities and pensions. Many estate planners don’t pay attention to them because what happens to the money in these accounts is not dictated by the usual estate planning documents drafted by attorneys. They are called “custodial accounts” because there is a custodian (like Edward Jones or Fidelity) holding the assets and you and that custodian have an agreement about what happens to that money when you die.
The agreement is often a long and complicated contract that you may not even remember signing. It was full of legalese and boilerplate provisions. Somewhere in there you informed the custodian where you want your money to go when you die. These are often called beneficiary designations.
Many of us vaguely recall signing these documents and very likely don’t recall who we wanted as our beneficiaries. We certainly don’t remember if we included secondary beneficiaries.
I know this because when I talk with my clients about their estate planning we discuss how their estate plan coordinates with their custodial accounts. When I ask who their beneficiaries are, I am often met with a blank stare.
Your beneficiary designations are important.
For one, you want to make sure they are current and appropriate. Often spouses or children are not added because they simply didn’t exist when the account was set up. I know of a young man who went to work for AT&T at age 22. He wasn’t married, he had no kids but he did have a 401(k). The human resources person at AT&T asked him who he’d like to be his beneficiary if he died. After laughing off his mortality (he was 22 and was going to live forever) he casually put down his brother and never thought about it again. Over the next 15 years he was married and had two beautiful daughters. He then tragically died in a car accident. Over those 15 years his 401(k) had grown to over $150,000. He never changed the beneficiary designation and therefore his brother and not his family got the money. Thankfully his brother was a stand up guy and gave the money to his brother’s widow and children.
Second, you want to be sure the designations are consistent with your existing estate plan. Your beneficiary designations may be current – but are they appropriate given your other documents and general intent? I recently sat down with a client whose son had a long time alcohol addiction. We discussed at length how to create an estate plan that would restrict his immediate use of her sizable estate. She also had a large custodial account (an IRA) as well as a life insurance policy. When I inquired about who the beneficiaries of the IRA and life insurance she didn’t really know, but assumed it was her only son. In fact it was her son and as is typical with these types of accounts, he would have received a large portion of her estate without the restrictions that we had carefully crafted into her trust. If he had gotten this money outright it would have been the exact opposite of what she wanted and would have been detrimental to her sons well-being.
Don’t let your custodial accounts beneficiary designations be an afterthought. If you don’t know who your beneficiaries are, call your IRA, 401(k) or life insurance custodian and ask them send you documentation of your beneficiary designations. If they aren’t current, make the appropriate changes. Then meet with your attorney to be sure your designations are consistent with your existing estate plan.
Eric S. Gullotta, JD, CPA, MS (Tax) focuses on 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.
