Having Your Will With IRAs and 401Ks
Wills and Trusts generally will not govern the distribution of your IRA’s or 401k’s. The designated beneficiary form directs who will get your qualified retirement plan after you die. Qualified retirement plans include IRA's and any plan created by ERISA, such as a 401k or a 403b retirement account.
If your "Estate" is listed as the designated beneficiary or if there is no designated beneficiary, then your heirs will have to open a probate in order for your retirement account to be distributed. Also, if you list your "Estate," then your retirement account benefits may need to be paid out in a lump sum, instead of over time to your desired beneficiaries. Therefore, it is preferable to list the specific designated beneficiaries, either the people or your trust.
The benefits of a qualified retirement plan can be distributed through a revocable Trust, over time, as long as certain precautions are taken. First, the named designated beneficiary must be the Trustee of your revocable Trust. Then, the revocable Trust must be valid under state law and become irrevocable upon the death of the participant. Also, the beneficiaries have to be identifiable from the trust agreement and a copy of the trust agreement needs to be provided to the administrator before the distributions are made.
Listing the trust as a designated beneficiary is very important if you plan to leave any of your qualified retirement account to a minor. A minor, under the age of 18, cannot receive more than $10,000 unless the court appoints a conservator. A conservatorship are more expensive and troublesome than a probate.
If you are married, then normally your spouse must be the initial beneficiary and your Trust, or others, can be the contingent beneficiary. Federal law requires spousal consent if you want someone other than your spouse to be the beneficiary of your 401K or other ERISA qualified retirement account.
With regard to your IRAs, federal law does not require a spouse to consent to the distribution of the IRA to someone other than the spouse. However, since Arizona is a community property state, a spouse does have a community property claim to one-half of any contributions that came from earnings of the participant spouse.
Therefore, if you desire to distribute your IRAs to someone other than your spouse, you need to get a spousal waiver. Your children or your trust cannot receive the entire IRA or the 401k, if your spouse does not consent -- even if the IRA or 401k existed prior to your marriage.
IRA’s and 401K’s are great for charitable giving as part of an estate plan, because qualified charities do not pay income tax. There are lots of opportunities for qualified retirement accounts and some pitfalls. Thus, be sure your designated beneficiaries are correctly listed.