All of our readers know just how important—how essential—a will or trust is to protecting your family after you pass away. Leaving clear and tangible instructions can prevent family infighting as well as hurt or unsettled feelings; and leaving a legally airtight will can prevent wasted time and money in unnecessarily long probate proceedings. But for all of this, there are a few assets that your will may not be able to address.
This article in CNN Money describes three assets that could cause you to “unwittingly disinherit intended beneficiaries, including your children, from significant portions of your estate,” namely your 401(k) plan, your IRA account, and your life insurance.
You can name anybody you’d like as a beneficiary in your will or trust, but when it comes to 401(k) plans it’s your spouse who is entitled to the money when you die. “If you want to leave a 401(k) to someone else, your spouse must first file a written statement waiving rights to it.” Even a prenuptial agreement won’t help if you want to keep your 401(k) assets out of the communal pot, you’ll have to convince your spouse to sign a waiver after you’ve tied the knot. “A person can’t give up spousal rights to inherit a 401(k) until actually married. ‘A prenup by itself is not a valid waiver according to the rules governing 401(k) plans.’”
Who will inherit your IRA or your life insurance is a little easier to control than who will inherit your 401(k). In the case of IRA or life insurance accounts the person named as the beneficiary on the account will always take precedence over a beneficiary named in your will. The most common inheritance issues we see with these accounts is when people forget to update their beneficiary forms after a significant life change such as a divorce or the birth of a child. In these cases it’s important to review and update your beneficiaries every 2-5 years to ensure there’s no confusion between your will and the designated beneficiary on the account.
Having a will or trust is important, but they are only a piece of a whole plan—a plan that likely includes many pieces. Being aware of all the pieces of your estate plan, and keeping those pieces working together and in harmony, is essential to ensuring that your family and your legacy is protected.