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Retirement Funds and Life Insurance Policies: Are They Part of Probate?

If most of your estate consists of money you have in an IRA and 401(k) at work and in a life insurance policy, you might have a few questions about how probate affects you, such as:

  1. How can I transfer my estate to my heirs in the most efficient manner possible?
  2. If I have named beneficiaries for my retirement accounts and life insurance policies, is it necessary to set up a living trust in order to avoid probate? What exactly is probate, and why do people try to avoid it when they can?

Answers:

There are a few ways to carry out the transfer of assets held in an IRA or 401(k). Depending on your situation, you must decide whether it is better to use a will or a revocable living trust.

In most cases, a will must be processed in probate court. Basically, probate is a process overseen by a court which supervises and ultimately authorizes distribution of the estate of a deceased person according to state laws. Because this process can take several months depending on the estate’s complexity, and court fees are involved, most people try to avoid probate, often by consulting an estate planning lawyer.

IRA or 401(K) with a Beneficiary Named

If you have a retirement account, such as an IRA or 401(k), with a named beneficiary, that person will only have to provide a death certificate to the account administrator; upon receipt the administrator transfers ownership of the account to the beneficiary, avoiding probate court.

IRA or 401(K) without a Beneficiary Named

However, if the retirement account has no beneficiary named, if the named beneficiary died before the account’s owner, or if the beneficiary is the estate itself, then the IRA or 401(k) will be subject to probate.

If you designate a specific person as beneficiary of your IRA or 401(k), the account will not have to go through probate, so creating a revocable living trust might not be necessary.

Life insurance policies work much the same way: if the named beneficiary survives the person who owns the policy, the proceeds are payable directly to the beneficiary without probate. In this case, a revocable living trust may not be needed if the goal is to avoid probate.

Sometimes It Is Best Not to Name a Beneficiary

Depending on your situation, naming a beneficiary may not be the best course of action—for example, if the intended recipient is a minor. In such cases, retirement and life insurance proceeds should be held in trust until the beneficiaries attain an age when they would be capable of properly handling their inheritance.

Generally, it is best to create a trust which will place the money from retirement accounts and life insurance under the control of a capable trustee, who may then invest and distribute the funds to the beneficiaries until they come of age. An estate planning attorney can help with the details of creating such a trust.

For help deciding how to distribute funds from IRAs and 401(k)s, contact Queens probate lawyer Richard Cary Spivack, and make the right choice for your family’s wellbeing.

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