The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 29. Beneficiary Designations

IT'S THE SIMPLE things that most often trip us up in financial planning. You probably don't forget to pay the mortgage. But financial planners say that clients make some of their biggest mistakes when naming beneficiaries. They suggest that a client name a spouse as beneficiary and children as contingent beneficiaries during their working years.

Once you retire and roll the money into an Individual Retirement Account (IRA), the rules become more complex. Seymour Goldberg, an attorney who specializes in retirement account issues, says he finds that clients often do not state clearly how children are to share in an IRA. For instance, a client might name his two children, John Smith and Mary Smith as beneficiaries. Under that arrangement, if John Smith dies before the account owner, Mary Smith will get half the account and the other half will be paid into the estate, Goldberg says. But usually that is not what the account owner intended. He probably wanted the money to be split between Mary Smith and John Smith, heirs, thereby treating his two children equally.

Goldberg suggests that clients who want the money shared equally between their children name the children "issue per stirpes," which means the children share equally. If one child dies, that child's share would go to his or her children. Goldberg says he finds that this, in fact, is what most parents intend to do and that they are surprised to learn that that will not necessarily happen if ...