When Retirement Accounts are Part of Your Probate Estate

Small estate planning mistakes can create big and expensive problems for the people you love most.

Here’s an example.

Designating beneficiaries on your retirement accounts like IRAs and 401(k)s may seem like a small detail in the estate planning process. If you forget to do this—and then you pass away—you have created a massive headache for your heirs, one that could be financially devastating.

Beneficiary designations on retirement accounts are critically important because they ensure that the assets are distributed according to your wishes and in a tax-efficient manner after your passing. When retirement accounts lack designated beneficiaries, they typically become part of your probate estate, subjecting them to the probate process. But that’s not the worst part.

If your retirement accounts are not properly designated with beneficiaries, the executor or administrator of your estate may be required to cash out the accounts, distribute the funds, and pay all the tax in a single year. Your mistake means that your heirs don’t get to take advantage of the  so-called “ten-year stretch" under the SECURE Act, a tax law that allows beneficiaries to set up an inherited IRA with the funds they received, take the money out over ten years, and pay the tax incrementally over time, instead of all at once.

What would your heirs think of the tax burden this mistake could create?  Trust me when I say it’s not the kind of thing that will make them think more fondly of you.

If you do anything today, why not review and update the beneficiary designations on your retirement accounts just to make sure you have named beneficiaries, and the people you’ve named are the people you want to inherit your retirement accounts? Then, double check your beneficiary designations every few years and after any significant life event such as a marriage, divorce, the birth or adoption of children, or estrangement.

This small detail deserves your undivided attention. It’s the only way to ensure that your retirement accounts are aligned with your estate planning goals and that your beneficiaries can take advantage of tax-efficient distribution options.

Do you need help creating an estate plan that achieves your goals? Kimbrough Law is here for you. Call 706.850.6910 to schedule your confidential consultation.