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Your Retirement Accounts May Not Need to Go Through Probate

Your Retirement Accounts May Not Need to Go Through Probate

A cartoon old man with his retirement plan

Retirement accounts have the potential to bypass the cumbersome process of probate if beneficiaries are chosen strategically. It’s important to name primary and alternate beneficiaries, provide property management for minor beneficiaries, and review beneficiary information annually or after any major life changes to ensure designations are up-to-date.

When an account holder dies with funds remaining in his or her retirement accounts, those funds are usually passed to beneficiaries without probate. However, complications can occur and those accounts could end up in probate. In such cases, the funds are frozen until the will is validated, creditor claims are settled, and beneficiaries are identified. Probate can cause delays, limit payout options, and reduce the amount of money received by the beneficiaries. To avoid probate, the account holder must plan ahead to have the funds passed in ways that don’t involve the courts.

Naming Beneficiaries

Normally, when a person establishes a retirement account, part of the process includes naming beneficiaries who will receive the funds when the account holder dies. The beneficiary makes a claim and the company sends the funds to that person without involving the courts. If beneficiaries are not designated, the funds will go into the estate and be subject to the probate process. Naming the estate as beneficiary will also send retirement accounts to probate, which means the beneficiaries may lose some of the funds and debt collectors will get their share before the beneficiaries do.

Naming the Spouse

In all states, 401(k) plans require a married person to name their spouse as a beneficiary to a retirement account. If the spouse is not included as a beneficiary, the spouse can file a claim to part of the account, creating a legal complication that could send the account to probate court. To avoid probate, an account holder should name their spouse as beneficiary or have the spouse sign a spousal waiver.

Naming Alternate Beneficiaries

Designating alternate beneficiaries is a good idea should the primary beneficiary die or lose the ability to receive funds. When alternates are not named, the funds in the retirement account will be paid to the estate and distributed through probate. Naming alternates can help keep accounts out of probate.

Making Arrangements for Minor Beneficiaries

Beneficiaries who are still minors cannot receive funds from the account outright until they become adults. If the account is left to a minor beneficiary without designating someone to manage it, the court may have to step in and choose a custodian. To avoid this, the account holder should set up property management or use the Uniform Transfer to Minors Act (UTMA) to choose a custodian for the account. An account holder can also set up something more long-term like a child’s trust, special needs trust, or spendthrift trust.

Keeping Beneficiary Designations Up-to-Date

An account holder can change the designated beneficiaries at any time. Updating beneficiary information is especially important if the primary beneficiary dies or the account holder has children, gets divorced, or gets married. Reviewing retirement account information can help avoid unfortunate surprises like having a former friend or ex-spouse receive the retirement funds, rather than the current heirs. Beneficiary information should be reviewed and updated (if necessary) annually or after any major life changes.

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