Growing up, you were told to save for a rainy day. So, you did all the right things—made annual contributions to your retirement fund, maximized the use of your company 401k, and invested wisely. You heeded the advice and, as a result, stashed away a small fortune. But now you’re wondering what happens if you never see the day to use it, or if you do and eventually pass away, will the people you love benefit from your financial prudence? The truth is if you have assets, you’re at risk of probate court. However, retirement accounts are set up specifically to pay your named beneficiaries upon death, avoiding probate (no court intervention, no expensive fees, or asking the judges permission to receive payment). But here’s the thing—minor mistakes in your beneficiary designations could propel your retirement accounts into probate or, worse, litigation. But don’t worry too much; we’ll teach you everything you need to know about retirement accounts, probate, and the steps you can take to avoid it.
When a person dies, their 401k or retirement funds pass to their designated beneficiary, avoiding probate.
But when you don’t name a beneficiary or if the beneficiary is deceased, your account will likely be divided among your family members according to state law or your last will and testament. Either of these scenarios means that your account would go through probate. Similarly, if your beneficiary is a minor, your account will likely have to go through the probate court process. Probate can be a lengthy, costly process for your surviving loved ones and one that happens in the public eye. Avoiding it means they’ll have access to money faster, keep more of it in their pocket, and have one less thing to worry about when settling your estate.
The simplest way to protect your retirement accounts from probate is by selecting valid beneficiaries.
A valid beneficiary is someone who:
While a beneficiary is typically a person, you can also name your trust as a beneficiary of these assets. Setting up a revocable living trust allows those assets to pass to who you want, when you want, and without court intervention.
Mistakes happen. But when they affect the well-being and livelihood of the people you love, it’s a little more personal than that. Here are three common mistakes that can really leave your family in the lurch and how you can avoid them.
If you name your children as beneficiaries on your accounts and you pass away before they reach the age of 18, they won’t be able to collect on their inheritance right away. The courts will have to pick a custodian for those accounts and set up a court-supervised custodial account. What if it’s someone you don’t trust? If you’re dead-set on leaving these funds to your children, you may be better off creating a Trust and naming them as a beneficiary. You can also designate a trustee that you’re comfortable with to manage these assets.
California is a community property state, meaning your spouse is usually entitled to half of anything you contribute to your retirement accounts during your marriage. If they’re not named as a beneficiary, they still reserve the right to claim part of those retirement assets, and have their day in court, slowing the division of your estate.
You can prevent this in two ways: 1) naming your spouse as a beneficiary of other assets that offset the amount they would have received from your retirement account or 2) having them sign a waiver of rights to those funds with the assistance of a family law attorney.
Forgetting to update your beneficiaries is a common mistake that can significantly affect your estate. Suppose your beneficiary dies or you forget to change it from your ex-spouse to your adult child. This can result in your accounts being probated. To avoid this, you should designate alternate or “backup” beneficiaries in their absence.
The last thing you want is a court deciding what’s best for your family’s future. But when you don’t put a plan in place that protects your family in your absence, that’s exactly what will happen.
That’s why we’re here.
At Meier Law Firm, we’ll help you create a legally sound estate plan that avoids probate, meaning no waiting for court approval to decide your family’s future and more money left in your family’s pockets. We’ll also help you update your estate plan to reflect changes in law, life events, and family members’ needs over time. And if you need help with other legal matters, we’ll be there for you, too. Book an estate planning session with Meier Law Firm today.