EP 30 – Who Should I List as my Beneficiary for my Self-Directed IRA or Solo 401k
Mat Sorensen: Yeah. Who should care more about your money than you. Don’t be lazy and just let Wall Street decide what to do with it. That’s what we’re doing here on the Directed IRA podcast learning how to take control and invest in the assets you like. But at one day you’re going to die. And, well, that turned quick
Mark Kohler: That turned really turned ugly real quick. I wasn’t thinking about self-directing money. I was just talking about people, you know, in their AA program, their relationships. I thought this was going to be more of a touchy-feely show, but I guess I’ll talk about money and death
Mat Sorensen: Death, taxes, the fun stuff. So, yeah, you are going to die. I hate to break the news to you and someone is going to get your retirement account, your self-directed IRA or 401k gets all of your retirement accounts when that happens. So that’s what we’re going to talk about today making sure you nail that process, get it down so that these pass on in the most tax-efficient way, also in the most strategic way from an estate planning perspective too Mark and I are both attorneys been helping clients with the retirement accounts, doing estate planning, which our law firm, has been doing for years. So we feel like we got some good insight on what you should and shouldn’t do. We’ve certainly learned from our clients over the years on what works and what doesn’t.
Mark Kohler: What Mat’s saying is we’ve learned from all of your mistakes and we’re going to hear your laundry, we’re just going to open the laundry basket up and just you just.
Mat Sorensen: Yeah, but we’ll refer to them as client number two or client number 12, we will not disclose the true identity of these people.
Mark Kohler: So, yeah, yeah, I’m trying to get my my camera here looking. So for those who are watching on YouTube, I want to make sure our heads are equal-sized because. We discovered we were shopping for cowboy hats and Mat has a bigger head than mine, and I just felt concerned about him with his head down, looking out for its own solar system. Look at that number
Mat Sorensen: It’s like an orange on a toothpick.
Mark Kohler: Well, we won’t reveal our hat sizes. I actually think they’re quite similar. OK, now. We are doing our estate planning special this time of year, and so a lot of people ask, should I have my trust be the beneficiary of my retirement accounts? And that’s actually a harder question to answer than most would realize. 20 years ago, 10 years ago, the government wasn’t doing us any favors. If you put your trust as a beneficiary of a retirement account, it could actually be a tax nightmare for your family. So there’s some new laws passed. Don’t listen to a financial planner that’s older that says never make your trust the owner, because I don’t think they are familiar with the law if they’re playing in taxes, so. But this is our annual special, we do estate planning, we’re talking about the revokable living trust, maybe we should talk about that option first. And then you’ve got your spouse, your kids, your mistress, your spouse, your kids, your mistress. I’m just throwing all those in there.
Mat Sorensen: Just your Mr. to the Mr. Mister. Yeah. There’s some misters out there that are hoping to get listed as the beneficiary. Yeah, well, let me say this on. You know, first that retirement accounts do not pass based on what you put in your will, not even in your trust. You have to specify who’s getting your retirement account on a beneficiary designation. So usually when you open up an account, there’s a section in here at Directed IRA where there’s a section. You got to say who’s the beneficiary on this account when you die? Who’s going to get it when you die and you can list primary and then you can list contingent. And we have lots of different options. And Mark and I are going to go through go through that. But the first thing I want to say is a lot of people mess up because they’re like they may have set up a retirement account years ago and don’t even know who is the beneficiary on it. But why did my estate plan last year, though? I did my will or my trust and I said, who gets it? That ain’t going to work. It needs to be on your beneficiary designation for your account,
Mark Kohler: Then I think it’s good to say right off the bat here for any of you that just your heart sunk in your chest going, wow, I, I don’t even know who I put when when you’re enrolled in your 401k at work. You opened up a Roth years ago. You could have been single or married and now you’re divorced, now you’re married. So all those life changes matter, of course, but you can change it. Here’s the good news. It’s not a tax consequence. You don’t just don’t. Yeah, it’s way cheap. You can just you just literally oftentimes go to the website wherever your financial instrument is that Roth or IRA or whatever it is, if it’s at work, you go to HR, but you can change it any time you want.
Mat Sorensen: If you’re directed IRA, it’s just a change of beneficiary designation form. It’s on the website. So yeah. And we have it right there. You can complete online. Yeah.
Mark Kohler: Ok, now what happens if you don’t do anything?
Mat Sorensen: Then it’s going to pass then you’re IRA custodian and the 401k administrators going to wait for the court order to say what happens to it. So you know, if you die without listing someone as a beneficiary, maybe you had a will, maybe you had nothing. The court’s going to have to appoint executor, personal representative for your estate and they’re going to come tell us here’s who’s getting this and we can move it based on that.
Mark Kohler: I think that’s a great one to talk about. Maybe this is I’m coming up with an outline for a blog article as we’re talking here, but number one is. I didn’t list anything. So what happens? And it’s much like Prince, I wrote an article on him in the Minnesota court system right now, dying without a will and trust. And it’s just been a debacle for five years going through the courts in Minnesota. So a court would have to say, who gets your IRA and whatever your rights in that law’s going to control. OK, number two, let’s say I was single and I named my parents, which is often, I think the case. They say, well, or who?
Mat Sorensen: Yeah, you never had kids. Yeah, you’re single, never had kids.
Mark Kohler: Yeah, so you’re single. You never had kids, you name your parents. You may name your special favorite lawyer and podcaster just because you he’s changed your life, that would often be a very typical. Yeah. And if you have a podcast with two lawyers, you choose to the better looking one.
Mat Sorensen: I thought you were going to say go 50/50. Oh, because I didn’t want them to list me entirely. I didn’t think you’d cut yourself out automatically there. See what I did there?
Mark Kohler: Yeah, maybe you’re right. Maybe I should be more careful there. I’m going to hedge hedge my bets. OK, let’s say I named my parents and I was single. Can my spouse come in and go, whoa, whoa, whoa, he’s married now or she’s married now? He or she should have never done that. I’m going to make a spousal claim and take the parents to court. Can they do that?
Mat Sorensen: Absolutely. And in now then there’s going to be a debate of whether that retirement account that you had was a marital asset. Now here is going to be the problem, even if you’re like but I started that account before I was married, OK, did you keep investing it and keep contributing it to it from the marital estate, from your joint checking account or any of those things? Now, it’s a marital asset, even though you may have had it before. Now, maybe you had a prenuptial agreement or something like that that could have cleared that out. But if you didn’t, your new spouse here, even if your intent was that your parents would get it or whoever you listed before, spouses are all you have a spousal claim. And in most states, it’s up to at least 50 percent, if not the entire amount. And I’ve actually been to probate court litigating those issues back when I was crazy enough to do litigation. And so and so. And it was only limited stuff. But but, man, the probate stories are crazy. So, yeah, there’s a spousal claim and we’re going to get into that on the beneficiary form. In fact, if you do not list your spouse as the primary beneficiary and you are married, your spouse must waive that in order for it to be valid. And I’ll go through the process and we’ll talk about that more. So if you’re married, it’s it’s you got a lot of things you got to do. To list someone other than your spouse as the primary beneficiary, who
Mark Kohler: Else is going to know about it? That’s what
Mat Sorensen: They are going to have to consent to it.
Mark Kohler: Now. Now, life insurance is a different story for you out there that say I’m going to go buy some life insurance and name a friend or a family member or very, very close, intimate friend that no one knows about is your beneficiary. If you’re like, oh, gosh, I feel very dirty today, just given these really bad,
Mat Sorensen: Salacious you know.
Mark Kohler: But there was an example. I tell the story all the time and it’s true is a court case in California. It’s about five, 10 years old now and it happens all the time. But it was one that actually went to the Supreme Court of California. There’s a guy that died out on the golf course and he didn’t have a mistress, happily married, whatever. But the life insurance policy listed his first spouse for like 20 years before and his current spouse went to go claim the life insurance, said, hey, I need I need the money. And they’re like, well, so-and-so is getting the money. He she was listed and she goes, oh, well, I’ll solve this. I’ll just give her a call, let her know it was a mistake. And I’m the current wife called it goes she had hoped. And so she ends up going to court and all the way to the Supreme Court and they go, was it a mistake? You don’t know, he said, and so the first spouse designated on the life insurance got it. Now retirement accounts are different and you may have a whole life insurance policy that has ongoing contributions or a cash value that was contributed to his marriage. I’m sure there’s some lawsuits that would be the parents might end up a little different. But now let me yeah,
Mat Sorensen: Let me complicate this. And this is Mat, the lawyer coming in here, just trying to make it complicated for you. So I’m sorry, but I think this detail could help some people 401(k)s and Solo 401(k)s included, they’re governed under federal law in terms of retirement plan rules. And federal law basically says if you want to list someone as the beneficiary on your retirement account, that is not your spouse, they must sign a consent form. All right. In order for it to be valid, they’ve got to consent to it.
Mark Kohler: IRAs are state law, 401ks are federal.
Mat Sorensen: Exactly now on the IRA side. IRAs are operated under state law in terms of when you die. I mean, they’re federally created. Right. But but they pass under state laws. Now, there’s about eight states, particularly community property states, that specify that a spouse also has to waive it passing to someone else or if they’re not going to be the primary beneficiary. So you could be in a state that’s not technically community property or it’s an IRA where you could get away with not doing a spousal waiver. Maybe, but most companies are going to make you get a spousal waiver if you want to list someone else besides your spouse as the primary beneficiary. And that’s always a good rule of thumb when in doubt. So I can see someone coming to me and say, well, Mat in my state, you don’t have to have your spouse, but OK, great. Does your spouse know that you’re sure your spouse isn’t going to make a claim on this when you die? Because let’s just get that taken care of now, if there’s any doubt about that.
Mark Kohler: Yeah, well, if they’re like, well. I don’t want my spouse to get it, and I want to make it hard for him or her. OK, just know it may not be 100% effective, but it definitely will make them jump through some hoops, that’s for sure. Yeah. Now, OK, so let’s say number one, I didn’t list anyone. Number two, I listed someone other than my spouse and now there might be a claim in court from that spouse for that amount. Why don’t I just name the trust and let the trust just figure it out? If I marry, then it’ll say, here’s the primary and if I’m not married, it’ll say, here’s the just let the trust. So then I only have to amend my trust once in a while. And I don’t have to go through all these different accounts on a regular basis of something big happens. What do you think?
Mat Sorensen: Yeah, well, here’s the. Here’s what I think. I always like listing spouse first, if you have one, as long as that’s what you want, right. And if you don’t, then just remember you’re going down the spousal consent thing we talked about here already. But as a general rule of thumb, it’s nice to see your spouse first, then the trust second again, if you got one anyway. The reason for that is when you pass away, there’s retirement account rules that say your spouse can inherit your account and do what’s called a spousal rollover, where they don’t take an inherited IRA when they get your account, they get what’s called a spousal rollover. It just rolls into an account in their name. Or if they already have an account, it goes into their existing account. All your assets just get moved over to their account. It’s all passing under the account rules under their name. You don’t have these inherited IRA rules now which make them drain it within 10 years. It’s it’s it’s just nicer because it can go to them as spouse. Now, you go ahead.
Mark Kohler: If I may comment. Now, law, the federal law that was changed in the last seven to 10 years is what’s called the see-through provision. So if you don’t bring your spouse or your spouse has to make do a fight to get it and he or she gets it. They’re still going to be allowed to do that spousal rollover and the trust says if you have this see through provision in there, but I think my opinion Mat would be that by naming your spouse, you make it a heck of a lot easier because then they don’t have to go to the trust company, the custodian, the broker, the bank, and say, hey, let me prove that I want to do a rollover with some verbiage or this, that or another. It’s just boom, done, but. It’s not fatal, is what I would say, would you agree with that because of this see through provision in the trust.
Mat Sorensen: If you listed the trust first and the spouse was the primary beneficiary under your trust? Yes. Yes. But my only hesitation to that is. If you list your trust as the primary beneficiary, you’ll need to provide a whole copy of the trust, your army will just send their certificate of trust or anything because you’re either a custodian or any retirement account must have on record the name. And who the heck the person is that your primary beneficiary. So I need that. We have to be able to find that and see that in your trust that, yeah, my spouse is the primary beneficiary and have all of my assets. It’d be nice if it identified the retirement account, but it doesn’t if it says all of my assets. And so so it’s possible to get away with that. I just to say, just as a retirement account is someone in that business, when someone list their trust first, we always say send us a copy of the trust. They don’t even I mean, it’s just like we pull our head out and it’s like now I have a beneficiary form that that doesn’t work. You listed your trust. It ain’t valid. If I don’t have a copy of your trust, it’s not valid.
Mark Kohler: Now, this is where we get into what we call the trifecta over on Main Street business, if I may interject. So all this trust talk some you may say I don’t even have a will, 50 percent of Americans don’t even have a will. If you’re listening to the show and you don’t have a will or trust in your building wealth, this is something you’ve got to deal with. It’s not worth the cost and the headache and the amount of money the lawyers will take to milk a probate. And we’re not probate lawyers, so I’m throwing some stones. I know someone sends me some hate mail, but divorce lawyers and probate lawyers, it’s not always in their best interest to have the divorce over or they have the probate over because they’re billing on it. You know, it just there’s no incentive to get the probate over when you’re a probate lawyer. So what I’d like to do is encourage all of you, get that trust. And when you do, we have a funding paralegal that is different names over the years of different funding, paralegals work in that position and then they get promoted or move around in the organization. But this funding paralegal is going to help review all of your entities, review your retirement accounts. Well, not so much. Get the paperwork from you and review it piece by piece. But they’re going to say, what are you got? Let me help you get this done. Here’s where you go to do this. Here’s where you go to do that. And there are some small fees oftentimes half off during that first three months after your sign of trust. So maybe a shameless plug there, but they go hand in hand. You want to get that trust finished at the same time you’re reviewing your beneficiaries.
Mat Sorensen: Yeah, let me make one other note on why I like spouse as if you have one, and that’s how you want to get a primary and trust second. One of the reasons of using a trust is when you die, if there’s creditors that your heirs may have is they can’t get into the assets, the trust, the trust can say, nope, we’re not going with the assets to that beneficiary. Let’s say your spouse that maybe has a judgment against him or her. So you’re like, well, I don’t want that. That could put into jeopardy. Well, the retirement account is safe from that anyways. So you don’t need the trust to protect from creditors because the retirement account is already creditor protected, unlike some other assets you may have. So there’s so in some ways, a lot of the reasons we have a trust creditor protection, for example, so that your assets just don’t go to an heir who has judgments against them and it goes poof and gets collected on by creditors. The retirement account is sheltered from that already. So that’s another little unique aspect of a retirement account from other assets. So hope that helps.
Mark Kohler: And if some of you that have already, I hope many of you that are regular listeners have persevered on this topic, you’re probably like, OK, I got it, guys. What’s the big deal? Let me make a couple of important points that some would be like, what is the big deal? Why are you even talking about this? I give an example. Let’s say you have his, hers and ours. So you’re in a second marriage. You build up a 401k or IRA. Now you’re married to a new person and you didn’t do the prenup thing. It was a little awkward. You didn’t feel like it were like, hey, we’re going to share everything. And then you sit down to do a trust and you say, well, why don’t I give my retirement account to my kids? You give your retirement account to your kids and we’ll split the home or we’ll split the business. We’ll split this. And you sit down at the kitchen table and you start horse trading because you’ve got these blended family and you start saying, OK, let’s put in the trust. You get this and your kids get that. My kids get this. It doesn’t matter it doesn’t matter, because if you don’t make this clear in the beneficiary designation or have your spouse sign a waiver that they agreed to that. Whatever you decide at the kitchen table is going to be in court and it’s going to be jacked up, and so when you have a blended family, you’re just know you’re going in with your spouse doing a good thing. It doesn’t have to be the prenup conversation or the postnup that’s really awkward. You can say, hey, I want to take care of your kids. I want to take care of my kids. We’re now married. We’re building wealth again. You got an old IRA. I got an old IRA. You got an old 401k. I got an old 401k. We got to figure out where the hell this is all going, because if you die tomorrow, I want to make sure your kids get what you want them to get and vice versa. And then it can be very collaborative. And you sit down and go, OK, let’s get our joint revocable trust. Let’s review all the accounts we have. Let’s sign spousal waivers where needed and let’s nail this thing. That’s what matters.
Mat Sorensen: Yeah. Yeah. And stuff is thirty trillion dollars in retirement accounts, obviously. So this is like such a huge amount that gets passed on to your loved ones. And so we just want to nail the nice thing is, is it passes and our beneficiary designation is actually pretty easy if you get it right. Like just fill out the form, right. Get your plan set. OK, let me go over another variation that I get what people want to do and just another thing to think about. Sometimes we get clients and it’s not so much the spouse as it is like the kids. They’re like, well, what happens when I, I want to just list my trust, but what happens when I die? And the trust, you know, is going to say, my kids get it, how are they going to get it? Are they going to get inherited IRAs? Are the is the trust going to be involved anymore? Because I want all these protections. I don’t want to get all the money immediately. What happens with my retirement account all right? Now, this is actually quite tricky and it takes additional planning. And for retirement accounts, you’re going to need to do some additional trusts and planning if you want a full Cadillac control, everything from the grave structure, the basic revokable, living trust, like what we’re doing that has the see through trust provisions that Mark talked about that’ll let your retirement account have your trust listed. And it will pass it down to let’s say you have three kids. So one third is going to go to each kid. Well, they’re each going to have to have an inherited IRA. They’ll each have their own Inherited IRA. They’re going to get one third of your account, OK? And but the trustee is going to have to determine whether to send the money to that account or not. Now, at that point, let’s say you have a provision in your trust that says, I don’t want my kids to get anything if they got a drug or alcohol addiction or if they got, you know, whatever whatever restrictions you put in there. So the trustees going to have to make that determination when they go fund this and let these inherited IRAs get created. But once that money’s in that inherited IRA, your original trust is not going to have a lot of controls. Your trustee is not going to be able to control the levers of the distributions without a new trust and an additional trust being included sometimes are called IRA trusts, which we’ve done. And this is an additional document. So if you want control again during the ten year life of the inherited IRA now, because that’s the rule Mark mentioned, this is under the secure act. Inherited IRAs have a ten year life. You’ve got to really have an additional trust that will be the owner of that account for that specific child. And then you can govern how the money goes out over that ten year window.
Mark Kohler: Ok, now, so maybe asking, well, what the freak do I need that? Here’s when you need it, if you are married or single and have kids under age 18 or kids that act like they’re under age 18. That’s what you need to think about this, and you go, well, if I die and my spouse gets it anyway, you know, sometimes a husband and wife die in the same accident. I know it’s fairly rare, but. That’s what you’re planning for and when you say, oh, my gosh, I don’t want to spend the extra grand or two grand or whatever to nail all this down, well, you’ve got a little 16 year old daughter or 16 year old son that you love to death and love a lot and you and your wife die. And now you dropped a half a million dollar IRA in their account in there. And they can do whatever they want at age 18. Is that what you were thinking? Probably not. Yeah. You’re going to heaven looking down. Freaking out.
Mat Sorensen: Yeah. So you got to be careful with the with that type of planning. And I will say that I’ve helped a couple of clients over the years doing it’s not something I do on anymore, but some of the other lawyers in the firm can do it. These are unique trusts. And so if you do have a special needs child or you do have a like Mark said, an adult child who acts like a kid still, but that you still want to get a retirement account, you’re going to want one of these special IRA trusts. Also, you said clients have really large accounts that still want a little more control over it, whether or not entrusting it to their kids yet. So you could do it in those scenarios. I don’t think the typical person necessarily needs to do it. You are going to have this check of time where the trustee is going to say, all right, I’m going to let these inherited accounts get created and let the kids have them. The trustees can have some controls in your estate to say maybe I hold this money back and then we distribute it out and just pay the tax now and I’m going to control it and control the distributions. So you can have a little bit of check still from the trustee to determine whether those accounts down is inherited or the trustee keeps them within the trusts and distributes amount in a different way.
Mark Kohler: And I love that I’m sitting outside for those that are watching on YouTube in my little courtyard here in California. And I just reached over to this little herb garden, grab this smell so good. What is it? Well, I’m in California, so what do you think it is? Yeah, yeah,
Mat Sorensen: Is that cannabis? I didn’t think that smelled great.
Mark Kohler: You know, this is Basil and I love some basil, heirloom tomato and some balsamic vinegar. Yeah, no, it’s not cannabis. That’s another episode of our Main Street show. One other thing that you can think about, too. Let’s just wrap this up. Maybe I know we can beat it to death and everybody’s situation is so different. But one other thought is you can say, OK, I’ve got some older children, some younger children. We’ve got his, hers and ours. As long as you sit down at the kitchen table and you carve it up. With what asset is best, for which child, think of it that way, so say you’ve got an older you’ve got a blended family with some older children, say, you know, when they benefit most from an inherited IRA, they’re smart. They know what they’re going to do with it. It’s a Roth. It’s this or that. And let’s give let’s designate the retirement account to those kids. Then this real estate over here where they’re younger, we can designate that real estate in trust for them, where there’s no custodian involved, there’s no timeline. The trustee doesn’t have to hurry in a rush to get it out for the directed. I mean, the IRA rules run out. And so that’s OK. And I have clients and I was going to just say the family farm. I have clients who are like, well, I want you know, this is the Oklahoma, Nebraska, Idaho thing. I got to have the oldest son who’s running the farm. You know, he gets the F150 in the on the farm. Well, what are the daughters get in? And it’s been this is kind of a. Male chauvinist farming world at times where the solar sun is running the farm and it makes sense, they want to keep it in the family for generations and generations and see, this is what one thing John Dutton is going to do. He wants Casey to have the farm and the little Yellowstone reference there.
Mat Sorensen: And because Beth could be a train wreck, you know.
Mark Kohler: Yeah, yeah, yeah. And she even told, you know, told me I don’t want it, but but this is where you can get creative and say, OK, I’m going to leave the family farm to this child, but I’m going to leave the retirement account to these kids, which they which is fair. Or you’re trying to, again, spread the dominoes around the board. So I think that’s a this is why this conversation so important too. And then you review it every five years or so. That’s it. When we amend a trust for a client, it might be five hundred bucks, just a one hour appointment and a quick amendment just reviewing. Well, you know, now if you have a major change, you get divorced, you get married, a kid dies, a spouse dies, you want to run in and make some changes and adjust it. And it doesn’t have to be a two or three thousand dollar experience redoing everything.
Mat Sorensen: Yeah. So, yeah, yeah. You can all you can always update the beneficiary designations and for any of you are thinking, oh crap, I probably need to update mine or I don’t even know what’s on there. Just go back to your retirement account company wherever your accounts at and, and go see who the beneficiary is. Like we said, everyone’s got a change or update a beneficiary form that that you can use. All right. And I’ll say this, too. We do have a totally separate episode on inherited IRA accounts. So if you’re going to be on the other end of inheriting an account, maybe from your parents or other loved ones, or maybe you already have or you’re in the middle of this having to deal with that, we’ve got a separate podcast episode just on that inherited IRAs and the rules on those. So go check that out.
Mark Kohler: Well, thanks, everybody for listening. Please consider getting over to our Main Street Business podcast, our sister podcast once a week, just on your favorite app type in Main Street Business. More broad topics on investing in small business ownership, getting out of debt, privacy, asset protection.
Mat Sorensen: Tax Planning,
Mark Kohler: Tax planning, How to play baseball, you know everything. So get over there and thank you for listening. We appreciate it. If you enjoyed the show, please give us a five star review and it helps others find the show. And we’ll see you next week for another exciting episode. Self-direct in your life.
Mat Sorensen: Stay calm. Self-direct on.