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Most pension and retirement plans provide death benefits if a person dies before receiving all of his or her benefits. To avoid having those funds go through probate, someone should be named as the recipient of any money that may be left in your plans. Probate is the procedure of settling the estate of a person who has died. An estate consists of property that the deceased owned at the time of death. Probate re-titles the property, putting it into the name of the person who was chosen to receive the property. The person who receives property from the person who died is known as the beneficiary.
Probate is necessary only if there is property that is subject to probate. Property that is subject to probate is called the “probate estate.” A particular item of property will be subject to probate only if the law does not recognize the new owner upon proof of the death of the prior owner or co-tenant. Pension and retirement benefits usually are not subject to probate because beneficiaries have been designated. If no beneficiary has been selected or if the decedent outlived all of the designated beneficiaries, the benefits will become subject to probate.
Pension and retirement plans generally offer both online and mail in beneficiary forms that allow you to select or change plan beneficiaries. Any money remaining in your retirement accounts and any pension payments due to you will go directly to the people that you name as the beneficiaries of your plans, avoiding probate.
You may name any beneficiary that you want to choose for your IRAs and employer profit-sharing retirement plans. Keep in mind that if you are married and live in a community property state your spouse has a right to half of the money that you earned during marriage. In that case, you may want to select your spouse as the beneficiary of at least half of the money to avoid possible legal battles.
You must name your spouse as the beneficiary of some plans, including 401(k)s and most pension plans, unless he or she signs a form giving up that right.
If you have a living trust, you generally should not name the trust as the beneficiary of your retirement benefits. The beneficiaries may lose some of the funds and flexibility to use those funds if you name your trust the beneficiary.
Payment to Beneficiaries
Typically, a deferred compensation or retirement benefit plan will provide for the payment of certain benefits to beneficiaries designated by the employee in the event of the employee’s death before retirement age. After retirement, the employee may elect a benefit option that will continue payments after his or her death to one or more of the designated beneficiaries.
Questions for Your Attorney
If you are interested in managing your finances and your property so that your family does not have to go through probate, you may want to contact an experienced estate planning attorney for advice.
You may want to ask your attorney the following questions:
- I am married but don’t want to leave all of my retirement benefits to my spouse – what are the legal rules?
- What are the different payment options available for receiving retirement benefits and what are the tax consequences of each?