401k Critical Mistake #8

You’ve been very careful with your 401k plan. You thought you did everything right. But ask yourself this:

When you named the people who will receive your 401k when you die, did you use the exact beneficiary designation language provided to you by the attorney who created your Will?

If your answer is no, or if you aren’t sure, there’s a strong chance you’re making 401k Critical Mistake #8 in THE 10 CRITICAL 401k MISTAKES series.

How so? Read on!

So, you finally did your “duty” and got a Will. Well, done.

That means your “estate plan” is complete, right?

Not so fast. Making sure that your money and property go to your intended heirs goes far beyond merely creating a Will. This is certainly true when it comes to estate planning for your 401k, which, for many, is one of your biggest assets.

Are you surprised to know that, when you die, generally speaking, your 401k does not pass according to the terms of your Will? If your Will doesn’t control where your 401k goes after you die, then what does?

Your 401k goes to whomever you designated as beneficiary with your 401k provider. You first designated beneficiaries when you started your 401k. Perhaps you’ve changed your 401k beneficiaries since then.

In view of this, if you don’t use the 401k beneficiary designation language provided by the attorney who created your Will, and instead craft the beneficiary designation yourself, it’s quite possible that, after you die, your 401k will pass in a manner that conflicts with, or even contradicts, the estate plan you created with your attorney. In other words, in the event of your death, your 401k might not go where you intended it to go.

401k Critical Mistake #8 is failing to use the exact 401k beneficiary designation language provided to you by the attorney who created your Will.

Sadly, “unintended consequences”—otherwise known as “Critical Mistakes”, are often the result of failing to use the exact language provided to you by your attorney to designate the beneficiaries of your 401k.  To help avoid five of the most severe unintended consequences, consider these questions:

1. Have you divorced since the last time you updated the beneficiary designations of your 401K?  If you have, is your ex-spouse still designated as a beneficiary?  If you’re married now to Spouse #2 it’s possible you don’t want to still name Spouse #1 as a beneficiary.
   
   
2. The last time you updated your Will, did you also update your 401k beneficiary designations?  If you updated your Will, it’s possible you’ll need to update the beneficiary designation of your 401k as well to reflect the update to your Will and overall estate plan.
   
   
3. Did you name “your estate” or “according to my Will” as a beneficiary of your 401k?  If so, you can run into at least two problems:
   
   
   1. 401k assets are generally protected from seizure by creditors.  At death, this protection from creditors is lost if you name your estate or will as a beneficiary.
   2. Naming your estate or will can result in higher income taxation to your 401k beneficiaries
      
      
4. Do you have a “bypass trust provision” built into your Will?  401k owners commonly limit their beneficiary designations to their spouse and children.  This beneficiary designation language might be appropriate if your estate is small but might be a mistake if your estate is large. Large estates can trigger large state and federal estate taxes upon death.  Because of this, attorneys for large estates often insert a “bypass trust provision” in the Will to reduce the eventual estate tax. If you have a bypass trust provision in your Will, it’s possible that language related to the bypass trust provision should be included in your 401k beneficiary designation.
   
   
5. Did you name a minor, such as a child, as beneficiary of your 401k?  If so, there are at least two potential problems.  One, 401k funds might not be accessible to minors upon your death.  Two, considerable funds left to minor children sometimes trigger custody battles if your estate plan is not clear about who their guardians will be upon your death.

• Periodically review the 401k beneficiary designation language provided by your estate planning attorney with your financial or tax advisor.
  
  
• Periodically confirm the beneficiary designation language on file with your 401k provider matches the 401k beneficiary designation language provided to you by your estate planning attorney.