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What Happens If You Leave a Retirement Account Off Your Will?

by TheAdviserMagazine
1 month ago
in Money
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What Happens If You Leave a Retirement Account Off Your Will?
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When planning your estate, you probably think about your home, car, and family heirlooms. But what about your retirement account? Leaving a retirement account off your will might seem like a minor oversight, but it can have big consequences for your loved ones. Estate planning is confusing, and mistakes can lead to delays, legal battles, or even unintended beneficiaries. Understanding what happens if you leave a retirement account off your will can help you avoid costly errors. It’s important to know the rules, so your assets go where you want them to.

1. Beneficiary Designations Override Your Will

The most important thing to understand is that retirement accounts, like 401(k)s and IRAs, usually have beneficiary designations. These are the people or organizations you list on your account paperwork to receive the money if you die. If you leave a retirement account out of your will, the account won’t automatically go through your will at all. The beneficiary form trumps your will, no matter what it says.

For example, if your will says your spouse should get everything, but your retirement account lists your ex-partner as the beneficiary, your ex gets the money. That’s why regularly reviewing your beneficiary forms is just as important as updating your will. Many people forget this, and it can create messy family situations.

2. The Account May Go Through Probate If No Beneficiary Is Listed

If you leave your retirement account out of your will and don’t have a beneficiary listed, things get complicated. In this case, the account usually becomes part of your probate estate. Probate is the legal process where the court sorts out your assets after you die. This process can take months or even years, and it often involves legal fees and court costs. Your heirs may have to wait a long time before they see any money from your retirement account.

This delay can be stressful and financially challenging for your loved ones. During probate, the court decides who gets the money based on state laws, not your wishes. So, if you want to avoid probate, always keep your beneficiary designations up to date.

3. State Laws Determine Who Inherits If There’s No Will or Beneficiary

If you haven’t named a beneficiary and you leave a retirement account out of your will, state laws take over. Each state has its own rules about who inherits assets with no clear heir. Usually, your spouse or children are first in line, but the exact order depends on local laws.

This can create problems if you’re in a blended family or have specific wishes for certain loved ones. For example, an unmarried partner or stepchildren may be left out entirely if you rely on state laws instead of naming them directly. When it comes to your retirement account, don’t assume your wishes will be followed unless you put them in writing.

4. Tax Consequences Can Change

How your retirement account is passed on can affect how much tax your heirs pay. If you leave your retirement account out of your will and don’t name a beneficiary, your account may be treated as part of your estate for tax purposes. This can result in higher taxes for your heirs, especially if the estate is large enough to trigger federal or state estate taxes.

Named beneficiaries often have more options for stretching out withdrawals and minimizing taxes. For example, a spouse who inherits an IRA can roll it into their own IRA and delay withdrawals. But if the money goes through probate, your heirs may have to take the money out faster, leading to a bigger tax bill. For more details on this, visit the IRS’s page on retirement account beneficiaries.

5. Potential for Family Disputes

Leaving a retirement account out of your will can spark family arguments, especially if your loved ones expected to inherit it. If you haven’t named a beneficiary or your beneficiary form is outdated, your heirs may fight over who should get the money. This can damage relationships and lead to costly legal battles.

Even if your will is clear about your intentions for other assets, confusion about your retirement account can create tension. It’s best to communicate your wishes and make sure your paperwork matches clearly.

6. Charitable Giving May Be Missed

If you want to leave part of your retirement account to charity, leaving it off your will puts that plan at risk. Charities can only inherit retirement accounts if you name them as beneficiaries on the account itself. If you don’t, your charitable intentions may not be honored, even if your will mentions a gift.

This is one reason it’s important to review both your will and your retirement account paperwork. If you want to support a cause, make it official on your beneficiary form.

How to Make Sure Your Retirement Account Is Handled Correctly

Leaving a retirement account out of your will can lead to confusion, probate, or unwanted heirs. The good news is that you can avoid these problems by reviewing your beneficiary designations regularly. Make sure the names on your retirement account paperwork match your current wishes. Update them after major life events, like marriage, divorce, or the birth of a child.

If you want to include your retirement account in your estate planning, talk to a financial advisor or estate attorney. They can help make sure your assets, including your retirement account, go to the right people. Taking a few minutes now can save your loved ones a lot of trouble later.

Have you ever found an old retirement account with no beneficiary listed? What steps did you take to fix it?

Read More

10 Reasons Retirees Are Hiding Their Finances From Family

Top Tips For Writing A Will When You’re Not Sure What To Do



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