Disclaiming Retirement Benefits

In a previous article, we discussed what to consider when naming your retirement plan beneficiary. This article addresses an additional point to take into account if you’ve decided to list your adult children as outright beneficiaries “per stirpes” – meaning that if the adult child predeceases you, his or her children will equally share the predeceased beneficiary’s share. 

This scenario is commonly selected by clients with adult children, but it is one that should not be chosen without taking into account the possibility of a disclaimer by the adult child beneficiary.

There are many reasons a beneficiary may disclaim. Perhaps the plan distributions will push the beneficiary into a higher tax bracket. Maybe the beneficiary has ample means and would prefer that the money go to his or her children directly, instead of the beneficiary receiving the distribution and then gifting that distribution to the children, so that gift tax concerns may be avoided.

Whatever the reason for the disclaimer, a beneficiary who disclaims is treated as if he or she had never been listed as a beneficiary in the first place. Most retirement plans are distributed in a series of levels, primary and contingent, with contingent beneficiaries only receiving if there are no remaining primary beneficiaries. In a situation where two adult children are listed equally as primary beneficiaries, and one disclaims, their share would most likely go to the other primary beneficiary listed, depending on both state law and the retirement plan contract.

The disclaiming beneficiary may want his or her share to go to his or her children instead, and perhaps that is what the owner of the plan intended. To accomplish a per stirpes result despite the disclaimer of a primary beneficiary, as in this situation, the beneficiary designation form should be worded “To X and Y, per stirpes including a qualified disclaimer executed by X or Y.” However, some retirement plan providers may not be comfortable with this language. Always consult with your retirement plan provider first to learn whether such a designation is possible, and if it is not, be sure to consult with your estate planning attorney about other options for accomplishing your goals.

To ensure that your retirement plan beneficiary designation is accomplishing what you intend, contact Mammel Law at 248-644-6326.

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