Choosing a Beneficiary for Your IRA or 401(k)

Transcript:
(00:00) I’m telling you there is three ways people build wealth in America there’s just these three big buckets of where people really build wealth and live on in retirement and it’s real estate investing which needs to be in your estate plan it’s business ownership for you small business owners and it is your retirement accounts there’s $38 trillion in retirement accounts okay is where all the money’s at we want to make sure the right people get [Music] it welcome everyone to the direct Ira podcast this is m sson joined by my
(00:31) co-host the man the myth the legend Mark J kler thank you we are excited to be with you today we got an amazing topic this podcast is all about talking about how to build your retirement account but today we want to talk about an important component to that of who gets it when you die or AKA who’s your daddy that say that way the subtext to that yeah so this is a you know a tough show because someone dies in this example uh it you so so I hate to break it to you you are yes we’re all going to die you’re not going
(01:04) to live forever so um oh my gosh I want to start with a story but our our producers tell us not to do that they’re like get right into it so let’s get a little content out and I’ve got a great little let me get into it here what’s super important you know on the front end of this is I don’t care what you have in a will or if you don’t have one I don’t care if you have a trust that has nothing to do with who’s getting your IRA or 401k if you don’t get the beneficiary designation right Whenever you set up an IRA and every day when
(01:33) we’re doing this at directed Ira we set up over 50 accounts Al loone yesterday every one of those people had to say who is their beneficiary when they die who gets their account when they die we’re going to go through the option your spouse your kids we’re going to go through that common stuff but guys this is not happening on your will this is not happening in your trust you name it and the controlling document is your beneficiary designation and the 401K is even more scary cuz some of you worked at a company for 20 years and may have
(01:59) been divorced twice already or has some kids you want didn’t want to get a dime of it that you need to update this stuff Y and this also correlates to the life insurance designations it’s the same rule uh you can’t control a life insurance policy with a will or a trust and the same thing goes for retirement accounts and health savings accounts coverdell accounts 529 accounts you’ve got to be on top of this so hopefully this is a great wakeup call for many of you to do a little personal audit a little benefit iary audit is what we
(02:31) like to call it and I I’m getting in my older years more and more organized with a nice little spreadsheet on my laptop that’s password protected that’s got a picture of my assets my businesses my wealth and it’s also got a a connected ex Excel spreadsheet and this is a good one to say here are the different accounts I have here’s the different um bank accounts retirement accounts investment accounts brokerage accounts uh crypto wallets uh exchanges all of that should be on some spreadsheet where you have a couple people significant
(03:06) other or a trustee for you to know where that spreadsheets at with a lot of this information that you’re updating regularly now that was a big picture point but it’s like that’s what you were trying to get you to do here let’s talk about what this means but if you feel overwhelmed just start with a simple spreadsheet on your laptop and start populating this when you’re staying up late watching TV yeah and this has got you thinking about oh man my estate planning entirely I haven’t done this I haven’t gotten my crap together on this
(03:32) who is going to get my stuff I haven’t thought this through I need to get it done I’m redoing mine right now actually take some action right now we do this every day in our Law Firm at kqs lawyers we help clients across the country set up their estate plans do the trust the powers of attorney who gets what whatever conditions or restrictions you want to put on it and the retirement accounts are a big component of it because I’m telling you there is three ways people build wealth in America there’s just these three big buckets of
(03:57) where people really build wealth and live on in retirement and it’s real estate investing which needs to be in your state plan it’s business ownership for you small business owners and it is your retirement accounts there’s 38 trillion doll in retirement accounts okay is where all the money’s at we want to make sure the right people get it all right so quick brief story and Matt’s heard me tell it before it was one of the classic cases in California about 15 years ago and it happens every year around the country uh this was a case
(04:27) that got to went to the Supreme Court and it just hit it put the nail in the coffin if you will that didn’t sound good umil was already in the coffin in this example example so um guy dies on the golf course yada yada his current wife goes in to claim the life insurance policy gets hold of the company you know I could tell the story with a little more um colorful commentary and I do oftentimes it’s a great case but the nutshell is the current wife inal she went to go claim the life insurance policy and they inform her uh your name
(04:58) is not the beneficiary and she’s like who is it oh it was the the woman your current husband was married to for about 10 minutes 30 years ago and her name’s on the policy and it was buried in there from this prior employment from years ago and it just kind of got carried forward never looked at never reviewed and she’s like ah not a big deal I’ll call her up she totally understands I’ve been his wife for the last 25 years of course she’s going to sign over that little piece of paper and give me my money uh well two years later in the
(05:29) Supreme Court nope the beneficiary designation controls we don’t care about how long you’ve been married the will the trust nothing matters but that one little sheet of paper that he filled out 30 years ago their first wife got all the money so this as again is a great example of why this really matters yeah and so let’s go over the common examples here the spouse as we were just teeing it up there is generally if you have one is going to be the first person you want to list as the beneficiary on your IRA or 401K there’s a reason for that
(06:00) and the reason is the surviving spouse can do what’s called a spousal rollover it’s super simple whether this is a Roth IRA a traditional IRA a 401k and that account gets rolled over into a new account in the surviving spouse’s name they don’t have to take out money there’s no penalties no distribution rules it just falls under whatever their age is at are they in rmd and they got to start taking money out or not it’s simple Roth to Roth traditional to traditional it’s just the way to go if you’re married you want your spouse to
(06:33) be the primary beneficiary and I’d say that’s step one that’s step one who whoa whoa I’m going to back up yeah step one you got to figure out who you want to be your beneficiaries and if you are married and there’s some concerns there this may be a time to reevaluate that but if you want to share it with kids or you because before you go start and changing the beneficiaries you better have a reality check of what you want yeah and let me say this Most states have a law that says on your retirement account if
(06:58) you don’t list your spouse your spouse needs to have consented to that okay and so you can’t just say oh I have a spouse but they’re not going to be the beneficiary of my retirement account now even in our beneficiary designation forms whether you’re at Schwab or Fidelity I don’t care where your accounts at you can pick and say I have a spouse but I’m not electing them to be my beneficiary that’s okay you might have other assets you’re planning for them and for some tax planning reasons you might want to do it this way um but
(07:26) just know that that the underlying con when you’re authorizing this in that little language you’re probably not reading the whole paragraph again this is whether you’re directed Ira or Fidelity or whatever it says and your spouse has consented to this yep I love it now I want to give a creative idea now we’ve got another podcast um it’s on the heels of this one we’d like to encourage you to listen to titled what to do if I inherit an IR a 401k so if some of you are asking well what would my kids do or what’s my spouse going to
(07:54) do on this role that’s topic for the next podcast but let’s just talk continue to talk about this just reason why you’re doing this and some creative ideas so let’s say you’re married it’s your spouse cool who’s going to be the backup beneficiary that the contingent beneficiary as it’s often termed because sometimes a husband and wife might pass away in an accident you never know and who’s going to be the backup well most agents because they don’t want to wait around for an answer will say let’s just make your kids the contingent
(08:27) beneficiaries three ways or two ways how how many kids you have well how old are those kids do you want them to just end up with this big pot of gold thrown in their lap at age 16 14 10 years old maybe they’re 26 and still act like they’re 16 so you’ve got a lot of times we have clients make their trust the contingent beneficiary where a trustee can divvy out that money to the kids with some rules and uh that’s got to be a part of the conversation is the contingent beneficiary yeah and just the mechanics on this and this is a directed Ira Rule
(09:01) and every other custodian is going to do this I just want to let you know there’s some procedural pieces to this yes we have my decisions there’s the estate planning concept of the trust I love that spouse First Trust second is is the way to go you’re going to need to provide a copy of your trust and not just your certificate of trust because your I your IRA custodian your 401k provider needs to know when you die who gets it and your your certificate of trust likely doesn’t say the beneficiaries on it it’s going to say
(09:26) the trustee and the data of the trust and so that actual Trust document does need to go to your uh retirement account custodian and they just save it in their records and their files they’re required to get it anyways and then when that trustee pops up later after you’ve passed we’re going to have the trust document there now it could have been amended later and stuff we can gather that and that can get figured out um but just know you’re going need to provide a copy of the trust now if you want to be private about this you certainly are
(09:52) entitled to do so you may say I’m married or not I want the trust to be the primary or the contingent but I don’t want my kids to know what’s coming their way or my brother or my sister or you may even choose a charity as your contingent beneficiary you can do that so you’re going to uh choose your level of privacy if you’re not concerned about privacy I think it’s helpful to let them know because you want them to not have to go on a wild goose chase if and when you pass away not if but when you pass away you don’t want them to be trying to
(10:26) figure all this out probably the best person to tell is the trustee of your trust or your executive of your will let them know hey I’ve appointed you to do this job and by the way I’ve went through and done an update of all my beneficiaries and by the way if anything happens to me here’s how you get into my computer and here’s how you get to this important list and you may want to print it out once a year and just give them a copy we get so protective of our passwords well guess what if you die tomorrow who the heck’s going to get
(10:56) into your stuff and and and know how to access it it could be a nightmare yeah be super careful I think even even more problematic than that is they don’t even know what accounts you have so many spouses or even particularly kids have no idea the families don’t talk about their money and where their accounts are and how much it is and the property they own they just don’t unfortunately and so um having a this is why doing a state plan having good records and stuff for this I love looping in the trustee and your retirement accounts are a huge
(11:28) piece of it okay okay so we know the beneficiary designation is what it’s is what matters most we’ve decided who to list as the beneficiary if you got a spouse we went through that um uh using a trust if you have it particularly if you have younger kids is important now you might be like you know my kids are in their 40s already they’re pretty well off um I I want to just get it directly rather them through the trust you you could do that I you know I I like listening the trust second but we still see that um uh pretty often um
(12:00) now when you do pass away there is going to be an inherit account created and we’re gonna have another podcast right following this one that goes over that now what happens when someone does pass away what is the mechanisms on that when they receive this but the reason I want to talk about why it’s important is you’re setting your family up for success for the Long Haul they can inherit your account and still keep investing it that’s the thing I want you to know for your own account I want to talk about your the kids
(12:27) inheriting accounts we have so many people getting inherited sometimes called beneficiary iies but for you I want you to think about my spouse can take this over and a spouse will roll over or my kids can get it an inherited account and keep the same tax protections if this is a Roth account they can keep investing it for another 10 years and keep deferring the taxes and have a CR cool tax strategy so teach them what you have particularly if you’re self-directing let them know about it do you want them to liquidate
(12:53) all the real EST estate or the private Investments you have to go by a mutual fund bring them along the journey with you teach them yes now another this is so good and let’s get creative here um we had a client um just I think a year ago uh a grandma wanting to leave her eight grandchildren uh a Roth IRA and so she was debated should I open eight Roth IRA and make eight different beneficiaries but then that would be unwieldy because now she’s investing eight different accounts for eight different kids to get
(13:27) but she chose ultimately to say all right I’m going to open one Roth account and then just create eight beneficiaries to be divided eight ways that way she’s taken care of these eight grandkids in a unique way her husband had passed on and she’s like I can invest this Roth IRA and know they’re going to all get this inherited Roth that they can invest for 10 more years listen to the next podcast another idea that I think is is really powerful is using the trust with the big picture for examp example let’s say we have a client that
(14:01) has a farm a second home maybe some rental property and they’ve got four kids two of those kids really want the real estate two of the kids would hate having the real estate and would rather have a brokerage account or a self-directed account so if you start trying to say oh I’m going to make these kids the beneficiary of or not the Ben yeah I’m going to make them a part owner of my LLC on my real estate or I’m going to have some sort of LLC contingent thing and then over here I’m going to make these kids the beneficiary of my IA
(14:32) but it’s not going to be equal and it’s like uh it can get really complicated trying to create this equality amongst your kids make sure your llc’s that own the real estate are owned by the trust make the beneficiary of your retirement accounts the trust and then you tell your trustee hey make it fair these kids might want real estate these might want retirement accounts add it all up and divide it in the most Equitable manner then you’re taking it away from these automatic distributions from these brokerage accounts where all they see is
(15:05) a name but if you make the trust the beneficiary you can let your trustee sort things out and use the money in the retirement accounts to offset other things you might give to another kid little Li B topic but the creativity can yeah yeah one last point I want to make and I had this conversation with a high netw worth client recently um this client had a pretty large estate they’re over the estate tax exemption okay and they had a couple million dollars in retirement accounts as well and um one of the things he was talking about is
(15:32) how do I keep my estate below the estate tax exemption which is like 25 million for a married couple now um and and to his credit he’s over that you know so he’s got these you know he’s got these problems in his life so um one of the things we talked about was and what he’s doing right now is converting all of his traditional accounts to Roth Now why would he do that because there’s two reasons why one is it’s going to cost taxes which he’s going to pay out of his estate that come that low lowers the value of it further down the 25 million
(16:02) and he’s got over a couple million bucks in account so this is like a half a million dollar check at least okay at least going to the IRS and to the state um but the other thing is is now as kids are going to inherit a tax-free account they get a Roth account but they take it at the same value they with a traditional account if I could inherit a $100,000 traditional account or a 70,000 Roth account I would take the 70,000 Roth account any day because when I make money on that and I take that 70k out I pay zero taxes but that $100,000
(16:34) traditional account when you’re a beneficiary inherits that account what happens they pay taxes they draw it out so they don’t really get 100K if they’re in a 30% tax packet they only get 70 man they got some state tax maybe at five or 10% maybe they’re in California to 10% they’re only getting 60k so that was a cool little tax strategy because it reduces the state for T tax planning purposes he did have a State not everyone has that problem but the second that might be more common for everyone else is they got to inherit the WTH
(17:05) accounts and they got to get that additional tax-free growth and so we’re going to go over that what happens when you inherit a Roth or traditional the beneficiary IAS inherited IRAs in the next podcast but I just want to throw that out there for context for any of you planning your state here and what to pass on excellent point Matt and I just think this topic is just not talked about enough because uh we open these accounts we open up life insurance policies we name our beneficiary and then it’s just out of sight out of mind
(17:34) and the the challenge I want to give all of you is to recognize that our successful clients and Matt and I have both done 10,000 consultations in our career and and continuing to do so and when we meet with clients that are really successful they’re dialed in financially they’ve got great passive income they’re people that take a proactive approach to their planning they they don’t know it all but they know enough and they have a good balance sheet they know how what their p&l is they know who their beneficiaries are
(18:07) they have an estate plan and this last week I was at a conference listening to some really big influencers successful people and uh in business and Athletics and entertainment and each one of them had a common theme and that was a complete understanding as to their purpose their goals very clear on what their objectives were and they and they were manifesting it they were living it and when we can get clear on what we have and where we want to go it just makes it easier and not taking this stuff seriously really undermines your
(18:41) your level of success yeah and so if you’re thinking man I don’t know who’s on my beneficiary designations this is the time to start calling and taking action and make sure is up to date let’s verify it if you’re not certain if you’re like I’m pretty sure is your answer that’s not good enough pretty sure is not good enough I want you to sleep good at night and know that if something happens to you one day uh that that the right people that you loved that you’ve worked so hard for it to build this money in your retirement
(19:08) account are going to get it and they’re getting the Strategic way too also think about the estate plan if you don’t have one get over to our Law Firm kqs lawyers we’re setting up estate plans every day for clients across the country our team can help you think about everything in your state get it planned and get it done in a document that’s that’s uh compliant in all 50 states and that also takes into account all of your wishes you want to make sure you guys got invited to the self-directed IRA Summit this is a one-day event the best way to
(19:33) quickly learn how to take control of your retirement using an IRA or 41k to invest in assets you know and love like real estate private companies notes not just the stock market and we hold this conference every year you can come in person or attend uh from a virtual format and have a great time associating with others that are in the same Community the same tribe and learn what’s working and how to do it it’s coming up in the very near future the links down below it’ll be in Dallas and again we would welcome you in person we
(20:03) got a rock band on the last night this part we got a rock band spoiler alert Mark and I make it on stage so we’ll see how that goes but get over to sdas summit.com you can register there we’ll see you in Dallas