Your retirement accounts (IRAs, 401(k), life insurance, pensions) are probably your largest asset. When you die, you expect the money from those accounts to help your spouse pay the bills, leave an inheritance for your children or grandchildren, or even fund a favorite charity. However, if your beneficiary forms are not completed correctly, or are outdated, your money will go in directions you did not expect.

“Sue” had a small IRA held at a bank that she opened 20 years ago, before she was married or had children. She “never got around” to changing the beneficiary on the account. When she was suddenly killed in a car accident, the money – $20,000 – went to her sister.

Designated Beneficiaries on IRAs are particularly important for required minimum distribution rules and for estate planning. If you name your spouse as your primary beneficiary, then they have several options on handling the money.

1. They can leave the IRA in your name, and take the distributions on an amount recalculated every year.
2. They can roll the IRA into their personal IRA. They can name new primary and contingent beneficiaries spreading out the distributions over a longer time frame.
3. They can disclaim a portion of the IRA. Disclaiming is an estate planning technique, where the recipient (your spouse for example) in essence states that they don’t want the money. The IRA would then go to the contingent beneficiary and any required distribution would be calculated on the new life expectancy. This estate planning tool is particularly effective if your spouse realizes after your death that they do not need all the funds.

If you name your spouse and a child, then the IRA could be split into separate accounts, allowing each beneficiary to take distributions using his own life expectancy.

If you name no one as beneficiary, then your IRA goes to your estate. The estate must now go through Probate, which delays distributions of the money, and the IRA must be completely distributed within 5 years. Other rules apply if you have already started taking distributions.

The same problem can occur if you name your spouse as beneficiary, but name no contingent beneficiaries. If your spouse predeceases you, and you don’t immediately change beneficiaries, then the IRA would go to your estate.

Sometimes people name a charity as one of the beneficiaries of an IRA. Rules on distributing money to a charity are very complex and you should understand all the ramifications, especially to your other beneficiaries if that is your intention.

Designated Beneficiaries on 401(k) plans and pensions are a bit different, because they are governed by ERISA rules. Spouses have the right to the account assets, regardless of who is listed on the beneficiary form. This can cause major problems in cases of second marriages, where children from the first marriage were “supposed” to receive the 401(k) assets and do not. Estate planning is essential in these circumstances, because pre-nuptial agreements do not apply. Or, in another instance, the owner of a 401(k) dies after his divorce. However, the ex-spouse was never removed as beneficiary on the account. All of the money would go to the ex-spouse.

There can be unintended consequences of incorrectly naming beneficiaries on retirement accounts.

“Tom” left his annuity to his grandchildren, intending the funds to help pay for their college educations. Unfortunately, a beneficiary has the right to take their portion of the account immediately. Several grandchildren withdrew the money and spent it.

If you want your retirement funds to be used for a specific purpose after your death, or you’re not certain the beneficiary can handle the funds, consider naming a trust as beneficiary. The loved one can be the beneficiary of the trust. The Trustee will invest the money and controls the distributions consistent with what you wrote in the Trust agreement. You will need an estate planner to be certain this is set up correctly.

As you can tell, naming a beneficiary on retirement assets is extremely important. After any major life event, such as death or divorce, you should immediately review and if necessary change the beneficiary forms. Review all beneficiary designations at least once a year. Print copies of your beneficiary forms and tell someone where the forms are kept. Don’t rely on your bank, brokerage firm or company to have a copy. Forms have been lost, or incorrect prior versions were kept on file. The point is to make your death less stressful and to have your intentions correctly carried out.