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Financial and Retirement Planning Blog

Probate & Your Retirement Accounts

Planning for retirement allows for many considerations and avoiding Probate is one of them.  The good news is if own a retirement account and have named beneficiaries, the account does not have to go through the probate process in most cases. Avoiding probate should be one of the goals of proper estate and retirement planning. While probate is a good fail-safe to ensure the property of a deceased owner is distributed fairly, probate also introduces delays, expenses, and headaches that are not usually necessary.

What Is Probate?

Probate is the judicial process in which the property of the deceased is fairly distributed to creditors and heirs. In the United States, probate is based on the wishes of the deceased as laid out in a document called a will. The probate court will ignore any instruction in the will that is not legally binding. If no will exists, state laws of inheritance are followed.

As probate is a judicial process, there will be court fees and lawyer fees paid out from the holdings of the estate. Some lawyers base their fees on the value of the estate in probate, so minimizing the value of the estate will save money which can be distributed to the heirs. The probate process also takes time – for a non-contested will, probate typically takes from six to eighteen months to complete.

Why are Retirement Accounts Different?

A will cannot supersede instructions in other legally binding documents or contracts. In the case of retirement accounts, there is an agreement on how the money will be distributed to beneficiaries after the owner’s death. If valid beneficiaries are named on the retirement accounts, those beneficiaries will be entitled to the portion of the account as named. If the will directs how the retirement accounts should be settled, the court will ignore that part of the will during probate as long as the beneficiaries are valid.

Under What Circumstances Do Retirement Accounts Go Through Probate?

There are a few circumstances in which retirement accounts will go through probate. If the retirement account owner has named his or her estate as the beneficiary, the retirement account will go through probate. If the beneficiaries are not valid – such as a deceased person or a minor – the account will go through probate.

In some rare cases, a retirement account owner may want their retirement accounts to go through probate. If the owner has outlived everyone he or she would care to name as a beneficiary, the owner may wish to pass the account through probate. A more common reason why retirement accounts pass through probate is because the account owner did not keep the beneficiary list up to date. If the owner started a job before starting a family, it would make sense to name the estate as the beneficiary. The accounts would go through the probate process if the owner did not change the beneficiary list as his or her life circumstances changed.

In the community property states, a living spouse is entitled to at least half of the value of retirement accounts. If the spouse is not named as a 50% or greater beneficiary for the retirement account, the spouse can claim their share in probate court. In other states, surviving spouses are guaranteed something from the deceased’s estate. If there is no or little remaining value beyond retirement accounts, the probate court will consider retirement account money even if the spouse was not a named beneficiary.

When planning an estate, it is essential to know how property will be distributed upon the owner’s death. Different rules and laws apply to different assets. In general, it is best to avoid probate whenever possible. For retirement accounts, the time and expense of probate can be avoided by naming valid beneficiaries on the retirement account. Be sure to check your beneficiary designations every few years to make sure the money is distributed according to your wishes.

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