Important Things to Know About the Beneficiaries of Your Pension

Pension and retirement accounts often form a large portion of an individual’s wealth and should be accounted for in an estate plan. If a retirement account holder completes a proper beneficiary designation, their account assets will bypass probate. Account holders often designate a surviving spouse or children as beneficiary, but they could also name a trust or a charity.

Retirement accounts must be owned by an individual, so they cannot be transferred into a revocable living trust during the participant’s lifetime like most other financial accounts or property. Further, they cannot be jointly owned. Thus, the only way to control how these accounts transfer at the time of the participant's death is through the use of properly designated beneficiaries.

In general, participants in an ERISA-covered plan can select anyone to be the plan’s beneficiary when they die.

• Most plans regulated by ERISA name a person’s spouse to automatically receive the benefit if the account holder dies first.
• If the account holder wishes to select a different beneficiary, their spouse must consent by signing a waiver. Otherwise, the spouse is entitled to 50 percent of the plan’s benefits, even if somebody else is named as the plan beneficiary.
• An ERISA plan holder who divorces and remarries should update the beneficiary designation to their current spouse or else the former spouse may be in line to inherit the plan benefits.
• An account holder who does not have a spouse can name an alternate beneficiary. This may be a person such as a child, parent, or sibling, but it can also be a charity or a trust.
• The named beneficiary of an ERISA retirement plan takes precedence over somebody designated in a will as the plan’s beneficiary when there is a conflict between the two.

IRAs are not covered by ERISA

An IRA account holder can name a beneficiary (or multiple beneficiaries) to receive the account assets. They can also name their probate estate to be the beneficiary of the IRA, in which case the account proceeds will be distributed according to their will (if they have created one) or according to state intestacy law (if they have not created one). A trust or charity can be designated to receive IRA funds as well. An IRA with no beneficiary designation is distributed pursuant to the IRA’s governing document.

Employees with a non-ERISA employer-owned pension plan may be able to name a beneficiary, but this right is not guaranteed. For a this type of plan, a current spouse may be entitled to a qualified joint and survivor annuity (QJSA) death benefit paid out over their lifetime. The plan may provide the annuity payout percentage, which could be at least 50 percent but no more than 100 percent of the annuity paid to the participant. It may be possible, with spousal consent, for a participant to waive the QJSA and select a different payment option.

Retirement assets can transfer directly to properly designated beneficiaries outside of probate. But these assets will be subject to federal and state income tax, and possibly even estate taxes. The SECURE Act could further impact your estate planning efforts.

Your retirement accounts could be the single largest store of economic value that you leave behind. To maximize their value to loved ones after you are gone, be sure that you understand the different inheritance and tax rules that may apply, review beneficiary designations regularly, and speak to us about how to best provide for your family’s future.