Sunday, August 2, 2009

Can My 401(k) Or IRA Be Part Of My Estate Plan? Can I Designate My Trust As A Beneficiary?

No longer are traditional pensions the norm. Today is the age of the 401(k), Roth 401(k), 403(b), 412(i), the SIMPLE, the SEP, the IRA, and the Roth IRA, among others. In our practice, we help our clients incorporate their varying investment vehicles into their estate plan and understand how to designate and change beneficiaries to be consistent with their estate and trust plans.

Common Question: Can I designate my trust, multiple individuals or favorite charity as a beneficiary in my 401(k) or IRA?

Answer: Yes, but each designation comes with separate issues which are discussed below. In addition, designations set forth in a will or trust are generally ineffective unless the proper designation forms have been completed with and submitted to the investment company.

What Do I Need To Bring To My Estate Planning Session Regarding 401(k), IRA And Similar Plans?

1. Bring copies of current 401(k), IRA and related investment plan statements. All the information you provide to us is confidential and attorney-client privileged. We need the statements so we can obtain:

(1) the present value of 401(k) or similar assets;

(2) the name of their managing institution;

(3) the name of the investment representative, if any; and

(4) respective contact information.

In addition, this helps us educate our clients about the true nature of their investment vehicle. Sometimes a client may believe they have a 401(k) but it is really an annuity, IRA or other investment vehicle, and possibly subject to different rules.

2. Contact your plan manager prior to our planning session and determine the current primary and alternate beneficiary of record. The proper contact is usually found in the upper right or left portion of the 401(k) statement.

3. Begin the process of determining the percentage of assets you want to allot to each beneficiary. This information will be finalized and provided before the estate plan is finalized.

Beneficiary Designation Form

If you recall, as a participant in a 401(k) or other plan, you probably designated a beneficiary using a "beneficiary designation form." Forms typically require the name, relationship and date of birth of the beneficiaries. Designating individuals, estates, trusts and charities is permissible.

And married participants designating someone other than their spouse will require spouse approval. However, each designation comes with separate issues, some of which are discussed below. Additionally, designations set forth in a will or trust are usually ineffective. Investment companies require original signatures and often signature guarantees from a financial institution (i.e., bank or brokerage); notarization may not be acceptable.

If you "never" received a beneficiary designation form should contact your investment representative for assistance. Beneficiary designation forms are often available online. However, execution in the presence of a professional (or review by a professional) prior to submission is highly recommended to ensure proper execution.

What Are The Default Rules In Your 401(k), IRA Or Other Plan?

Sometimes clients have simply not completed a designation form and relied upon the plans' default rules that are in place in each plan. General rules place the spouse first, children second and the estate third. Still, each client should research his or her plan's hierarchy before relying upon defaults. An uninformed decision could wreak havoc upon the estate and estate plan.

When relying on default provisions, we educate our clients so they understand both the legal and practical effects. For example, the definition of "spouse" affects plan participants differently. Someone in a long-term relationship or same-sex relationship (or marriage) may not benefit from a default definition, unless it specifically encompasses his or her set of circumstances.

Likewise, a perceived husband in a "common law marriage" might not receive his wife's assets if the default definition does not consider him a spouse. In either event, plan assets could pass from the deceased owner to someone other than the "intended" beneficiary. Thus, we help our clients understand default provisions before using them.

Multiple Beneficiaries, Allocations And Contingent Beneficiaries

One thing that can happen is that clients have designated less or even more than 100% of their IRA or 401(k) plan's assets. Active designation of beneficiaries requires disposition of 100% of the assets. Allotment in excess of 100% often results in the payment of proceeds in proportion to the proposed allocations.

For example, when two primary beneficiaries are named and each is supposed to receive 100% of the assets, each ultimately receives 50%. Also, when two or more primary beneficiaries are named and one predeceases the plan owner, all assets should pass to the survivor beneficiary.

Clients often do not know, or understand, this possibility. Therefore, clients looking for relief from the contractual standards should consider the use of estate-planning instruments.

In addition, failure to name contingent beneficiaries results in distribution pursuant to default provisions. Without designations, assets are paid to the deceased participant's estate unless otherwise determined by law. Allocations up to 100% are required. Also, the death of one of the two or more contingent beneficiaries leaves the survivor receiving all assets.

Designating Your Trust As A Beneficiary

Participants with a trust, of any kind, can designate it as the beneficiary by inserting the trust name in the form. Designating a trust allows the plan participant to:

(1) avoid probate or administration delays and expenses;

(2) possibly enjoy creditor protection of assets; and

(3) further the trust's stated purpose using additional funds.

Depending on the terms of the trust a lump sum distribution may be required, causing a taxable event. Each situation differs.

A trust holding net, lump sum proceeds will have flexibility in management and investment. Alternatively, a trust that is eligible to continue the plan or roll it over may defer taxable gains, albeit while investing in the respective plan's products.


Clients participating in 401(k), IRA and other plans must make informed decisions when designating their trust, estate, charities or individuals as beneficiaries. At our firm, we take the time to review the effect of beneficiary designations with our clients.

We inform them of the positives and negatives of defaults, specific designations or using a combination of both. We discuss what happens, for example, if beneficiaries predecease the plan owner, under certain default situations, or if specifically named. We review distribution under those circumstances. We remind our clients of the ability to name trusts and charities as beneficiaries.

We handle the technical and legal aspects. Our clients do not need to become expert in these issues or feel bogged down in them since we are the experts. Instead, we focus our clients on their intent and provide them with the methods of achieving their goal.

Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210.
Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation, in San Marino, California. He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his office is conveniently located for clients in the Los Angeles, Orange and San Bernardino Counties. The firm website is http://www.moravecslaw.com/