#1. Beneficiary designation form controls.

The inheritance of retirement funds is governed by the beneficiary designation form and NOT by your will, trust or the probate court. For instance, if you only name one child on the form but have a will that states that your estate will be equally divided between your five children, the child named in the beneficiary form takes the entire retirement account.

#2. Beneficiary designation form – don’t be limited by the form

A beneficiary designation form is a starting point. Frequently, there is only room on the form for one or two names. You can always name more than that by indicating that you are attaching a list with additional names. Always include identifying data – name, address, phone number, date of birth and Social Security number.

#3. Beneficiary designation form – is it current?

Don’t assume your benefits office or IRA custodian has an accurate beneficiary form. These forms, just like anything else, can get lost, particularly with the numerous mergers and acquisitions of bank, brokerage houses, and back-office administrators. In other words, these forms may no longer exist much less be current and accurate.

#4. No beneficiary designation form

If you never filled out a beneficiary designation form, or if it can’t be found, your probate estate will be deemed to be the beneficiary of your retirement funds. This means that a probate proceeding will have to be opened. This is not a problem in Arizona but can be a huge headache in other states. Also, since the funds are part of your probate estate, they may be available to be seized by the creditors of your probate estate.

#5. Beneficiary designation form – minor children

If you want your minor children or grandchildren to inherit your retirement funds, then you should address what will happen to those funds when the child turns 18 years old and thereby has unrestricted access to those funds. It is a better practice to create a trust for the benefit of those children that can continue to hold these funds until the child is at an older age (often 25 to 35 years old) to more maturely manage the money.

#6. Beneficiary designation form – divorce

Never assume that the terms of a divorce decree will alone be enough to remove a former spouse as beneficiary of your retirement plan. The United States Supreme Court recently held that, unless the ex-spouse’s name is removed from the beneficiary form, then the ex-spouse will remain as beneficiary, even if the divorce decree specifically states that the ex-spouse has not rights to the retirement funds.

#7. Distributions from inherited IRAs & the five year rule

The general rule is that, when you inherit an IRA or other retirement asset, you must withdraw those funds within five years of the date of death. But there is a huge exception to this rule that many advisors are not aware of. If the beneficiary is an individual (rather than, say, a charity or probate estate), then the beneficiary will often be able to take payment over the life expectancy of the beneficiary. This means that the funds can continue to grow tax-deferred for decades if done correctly.

#8 Lifetime distributions if high medical expenses

Generally, retirement money are the last funds you want to use since the funds grow tax-deferred. However, if the owner of the account has large medical expenses (such as the nursing home), then these expenses, deductible on your tax return to the extent they exceed 7.5% of adjusted gross income, will offset what would otherwise be taxable income. This will greatly lessen or eliminate the taxes incurred by reason of the withdrawn funds.

#9. Lifetime distribution if in lower income tax bracket that children

Again, normally retirement funds are the last source of funds you will use. But, unlike most inherited assets, the person who inherits the retirement account will pay income taxes when that money is withdrawn. If your child is going to inherit these funds and if that child is a high income earner (and hence in a high income tax bracket), it may make sense to withdraw the money during your life and pay the tax at your lower tax rate rather than have the child pay tax at their higher rate.

#10. Creditor protection

A huge but often overlooked advantage of retirement plans is that the money in retirement accounts are protected from creditors. This was a major development in the much-maligned bankruptcy bill that took effect last year. In Arizona, these funds are protected even without a bankruptcy.