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Does A Retirement Plan Pass Through Probate? Part One.

Discussing a Document

Much like life insurance that goes to the individual named in the policy, the retirement plan goes to the individual named on the beneficiary designation in the plan document. If you don’t have a beneficiary designated or the individual that you designated is deceased, the account value can wind up in your probate estate; and if this happens, the only choice is that all the taxes are due right away, and there is significant inflexibility.

No, it does not. It transfers by beneficiary designation. Much like life insurance that goes to the individual named in the policy, the retirement plan goes to the individual named on the beneficiary designation in the plan document. If you don’t have a beneficiary designated or the individual that you designated is deceased, the account value can wind up in your probate estate; and if this happens, the only choice is that all the taxes are due right away, and there is significant inflexibility. But in general, it will avoid probate.

Why Is Designating The IRA Beneficiary Critical to an Estate Plan?

If you do not have a beneficiary designated, it winds up payable to your estate and in your probate. There is no longer a choice of deferring the taxes for any of your beneficiary. The taxes will be due in that year, and your beneficiaries will potentially lose the advantage of taking the tax deferral from your lifetime and adding that tax deferral to their lifetime. There are financial calculators that can demonstrate this to be easily a seven-figure mistake on larger retirement accounts. Maintaining control over your designations and addressing them as part of your estate planning process, is very important from a financial standpoint.

Why Is It Important to Name a Contingent Beneficiary?

A lot of times we will name a spouse or the kids. For example, a person opens up an account, and he’s got a wife and one kid. Child one is named the contingent beneficiary, and they go on to have children two and three, but they never go back and revisit their beneficiary designations. So Mom passes away than Dad, and the retirement account goes to one kid when there are three. This is something that you have to stay on top of, review, and address on a regular basis to make sure that whatever designations you have in place reflect your goals.

Whom Should You List As A Beneficiary On Your Retirement Plan?

Ultimately, your beneficiary is the person that you would want to inherit your money. Very often it’s your spouse, and then your contingent beneficiary would be your children. Sometimes there might not be a spouse nor a child. You can have charitable beneficiaries. The nice thing regarding charitable beneficiaries is they won’t have to pay income tax on the funds they receive. You can use this to offset some estate taxes if you are fortunate enough to have that problem, but very few of us have to worry about the estate tax. As far as whom to designate as your beneficiary, it is really up to the individual, but commonly it is family.

For more information on Retirement Plans & Probate, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling the estate planning lawyers of Krause Donovan Estate Law Partners, LLC practice law in the areas of Probate, Wills, Estate Planning, and Trusts. We assist clients in and around Madison, Wisconsin with all matters related to estate planning, trusts, and probate matters. Request a consultation with one of our experienced attorneys to discuss strategies to protect your retirement plan for your family.

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