Most Florida residents are aware that a drafting a will is a prudent step to take. A will can help to reduce tax exposure and ensure that heirs receive as much of an estate as possible. However, many people do not realize that retirement accounts, such as IRAs and 401K plans, may not be covered by a will. The law in the area will give the beneficiary clauses of retirement accounts precedence over the terms of a will. This means that keeping the beneficiaries on these accounts up to date is an important part of estate planning.
The consequences of not doing this can be severe. Americans hold about $6 trillion in IRAs and as much as $6.5 trillion in 401(k) plans. These retirement nest eggs often make up a significant part of an estate, and many people do not think to change beneficiaries after a divorce. This could lead to a former spouse inheriting a substantial amount of money that an individual may have assumed would be allocated according to the terms of their will.
Changing the beneficiary on these accounts is usually quite straightforward. The beneficiary on an IRA can be updated by contacting the relevant financial institution or insurance company and completing a form. Modifying a 401(k) plan usually entails contacting the human resources department of the employer. Another prudent step is to ensure that all such accounts have a secondary beneficiary listed.
This is an example of how a seemingly small oversight can have a profound effect. An attorney with estate planning experience will likely have encountered situations like this many times and may be able to help their clients to avoid this kind of pitfall. These matters can be difficult to face, but having them settled can provide peace of mind.
Source: ABC News, "How Your Ex-Spouse Could Inherit Most of Your Money", Laura Mattia, May 23, 2014