How to Pick the "Right" Beneficiaries for Your Retirement Accounts
Making sure that you and your assets are protected at the end of your life is a standard part of our planning process at Keen Wealth. Over the past several years, we’ve welcomed many new clients who have been putting off estate planning decisions for far too long. Living through the pandemic gave these folks the sense of urgency they needed to sit down with my team and start thinking about the legacy they want to leave to their heirs.
We have some good articles and podcasts about the estate planning documents that everyone should have on our website. Today, I want to talk about the beneficiaries you’re going to name in those documents and how to avoid some common mistakes that can make a hard time for your family even more difficult.
1. Think about who you want to support – and how.
Nowhere is it written that you have to leave all of your children, grandchildren, and other beneficiaries an equal share of your estate. If you want to designate a larger share for a loved one who needs a leg up or an altruistic family member who’s working on a cause that’s important to you, that’s your prerogative.
On the other hand, if you worry that leaving a younger heir “too much too soon” is going to feed some bad money habits, you don’t have to drop a lump sum in their laps all at once. Consider setting up a trust account that will protect your assets until heirs reach a certain age. You could also name a trustee who will help your beneficiaries learn how to manage money better and grow into the legacy you’ve left them.
Many folks also decide to make charity a part of their legacy planning. Designating specific organizations as beneficiaries is one option. Another is to establish a charitable trust or your own philanthropic organization.
2. Name your beneficiaries specifically.
Folks who just want to get their estate planning over with often leave everything to “the good kid” and trust that beneficiary will divide your assets fairly. Unfortunately, I’ve seen too many situations where “the good kid’s” idea of fair is, “I’ll keep it all.” And even when that beneficiary does act with the best intentions, the other members of the family might not be happy with their allotment. The same problem can occur if you just leave your assets “to all of my children.” Years of bad blood and even lawsuits can follow.
One reason to have an estate plan is to make settling your estate as painless as possible for your grieving loved ones. I understand that thinking about which of your beneficiaries should get what and how much can be uncomfortable and lead to some painful decisions. But I’d encourage you to think about any undue burdens you might be putting on loved ones as well if your wishes aren’t specifically outlined.
3. Check your custodian’s beneficiary rules.
When we talk about estate planning and beneficiaries, we’re often focused on your last will and testament. It’s important that you check with the custodians of your retirement accounts to see what requirements they have for naming beneficiaries. Stating in your will that your 401(k) balance should go to your son isn’t going to cut it with some custodians. According to their rules, your account might be designated as having no beneficiary, which will create a whole separate mess for your heirs to untangle.
4. Be careful with your numbers.
Some folks designate specific amounts of their assets for specific beneficiaries. But there could be scenarios where the numbers don’t add up when it’s time to settle your estate.
For example, let’s say you have $150,000 in an investment account that you’ve earmarked for your grandkids, and in your will, you state that your granddaughter should receive $100,000 and your grandson should receive the remainder. What happens if the value of that account drops to $100,000 or below once your estate is settled? Is your granddaughter going to feel entitled to the whole amount? Is your grandson going to sue if he doesn’t agree?
You can make specific provisions about how your assets are divided if they increase or decrease in value. But with assets that can fluctuate, or if you want to divide everything equally, it’s often better to designate percentages to your beneficiaries.
5. Review your beneficiaries annually.
Again, if you’re a Keen Wealth client, you don’t have to worry about remembering to do this because reviewing beneficiaries is on the checklist that we run through at our annual meetings.
However, I do encourage clients to periodically take stock of the relationships in their lives, the things that are most important to them, and the legacy that they want to leave. Like every other aspect of your estate plan and your financial plan, your beneficiaries list isn’t set in stone. As your life changes, your legacy wishes might evolve as well. At Keen Wealth, we consider it a real honor to help our clients keep those goals and their plan in sync throughout their lives and into the next generation.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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