Some people will make a mess of their key beneficiary forms

Staying Ahead

Dollars & Sense

March 19, 2000|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

THANKS to years of amazing stock gains, and the growth of 401(k)s, much of your wealth may be tied up in retirement assets. If you die, they'll probably pass to your spouse or children. But will they really? Some people make a mess of their beneficiary forms. Or your company or plan sponsor might make the mess, by severely limiting what you're allowed to do with your money.

Here are seven ways to make sure that your retirement plan passes to the right people and does them the most good:

(1) Name a beneficiary when you open the plan.

Some people can't decide who the beneficiary should be, and never get around to naming one. Maybe you're single, with no obvious beneficiary. Maybe you're separating from your spouse and want to leave your options open.

If you're married and die without naming a beneficiary, some corporate plans automatically pay the money to your spouse, says attorney Natalie Choate. Or the law may require it.

But other plans and most IRAs will pay the money into your general estate. There, it's divided according to your will.

If you die before 70 1/2, and the money from your retirement plan goes into your estate, your heirs can lose many years of valuable tax deferral. They'll have to take their money out of the IRA sooner than they otherwise might, and pay the tax that year.

(2) Be sure you name all the beneficiaries you want, for your insurance and retirement plans.

The forms are typically short, with room for no more than two names. So you might think you're not allowed any more, when you can have as many beneficiaries as you want.

"People don't realize that beneficiary forms are like wills," says attorney Seymour Goldberg of Goldberg & Goldberg in Garden City, N.Y., and author of "J. K. Lasser's How to Protect Your Retirement Savings from the IRS" (John Wiley; $24.95).

If there's not enough room on the form to list all your beneficiaries, attach a rider containing the names. Your lawyer should ask the company to date-stamp the rider and mail you a copy.

(3) If you name a contingent beneficiary, understand what that means.

Some people think that contingent beneficiaries get paid right after primary beneficiaries do. Not so. A contingent beneficiary gets paid only if the primary beneficiaries are dead.

If you put down your older children as primary beneficiaries and the younger children as contingent, the younger children probably won't receive a dime.

(4) Check every three or four years, to be sure that the right beneficiaries are still in place, Goldberg says. Sometimes change-of-beneficiary forms get lost. Never sign a form that you send in blank.

(5) Re-read the beneficiary form, on your life insurance and retirement plan. You're looking for two critical items.

First, do the forms account for children you might have or adopt in the future? If not, and you die before adding a new child's name as beneficiary, that child won't inherit. Second, if one of your adult children dies, what happens to his or her share of the money? Is it divided among your other adult children, or does it pass down the line to your dead child's children (your grandchildren)?

Believe it or not, most beneficiary forms cut out your grandchildren, as well as any future children you might have. You might need a tax lawyer to help you amend the form. Unfair. You should be able to choose these options on a form.

(6) Get a good attorney if you want a living trust to inherit your retirement plan. To make this work, you have to comply with a lot of technical Internal Revenue Service rules.

(7) This final tip is for beneficiaries. Under a recent IRS ruling, tax deferrals can be passed from one beneficiary to another, says Martin Nissenbaum, national director of retirement planning for the consulting firm Ernst & Young.

For example, say you leave your IRA to your son Sam, who sets up a lifetime-withdrawal plan. Then Sam dies, leaving his estate to his daughter, Lisa. She can get the deferral, too, by continuing to withdraw the money on the schedule that Sam set up.

Some institutions don't realize this, and try to force an early withdrawal. Resist, says Nissenbaum.

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