Retirement accounts can end up in probate—but if you choose your beneficiaries strategically, there are ways to steer clear of that cumbersome and costly fate.

Financial questions after the death of a loved one can make the aftermath even more painful. What happens to the deceased’s assets, for example? Will any of their retirement accounts have to go through probate?

Making this period as calm as possible depends on strategic advanced planning. Here's what you need to know.

Key Takeaways

  • Retirement account assets don't have to go through probate, if you set up your account to avoid it.
  • There are many ways retirement accounts can end up in probate, usually because of an easy misstep: complicating the beneficiary designation.
  • Review beneficiary information once a year.

Protecting Retirement Accounts from Probate

When a person dies, most of their assets are frozen until the will is validated, all debts paid, and beneficiaries of the will identified—aka the legal process of probate. That process can happen rapidly or at a frustrating crawl.

Retirement account assets, however, generally don't go through probate. (This includes IRAs, 401(k)s, 403(b)s, and a number of less-common types of retirement accounts.) The reason: When someone opens a retirement account, part of the paperwork includes naming beneficiaries, either one or as many as the account holder likes.

When the account owner dies, the companies administering the accounts must hand over those assets to the beneficiaries. The contract serves as the will for these assets, avoiding probate. More good news: In this situation, creditors can’t get their hands on the accounts to collect debts.

If retirement accounts don’t go through probate, creditors can’t get their hands on the accounts to collect debts.

 Beneficiary-Selection Mistakes That Can Cost You

There are many ways retirement accounts can end up in probate, though. Usually this results from an easy misstep: complicating the beneficiary designation. Here are some examples.

Not naming your spouse

In community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and, in some cases, Alaska—a spouse is entitled to half of anything the other spouse adds to their retirement account during the marriage. That means if the retirement account owner names other beneficiaries in addition to (or instead of) their spouse, the spouse can file a claim to part of the assets; that will send the accounts to probate. (In all states, one must name the spouse as beneficiary to a 401(k) unless that spouse signs a special waiver.)

Naming a trust or your estate

Any money distributed through your estate will go through probate. Bill collectors will get their share before the beneficiaries of the estate get theirs. 

Naming a minor

To avoid probate, also designate someone to manage the money for the minor until he or she becomes an adult. Any financial institution can help navigate the Uniform Transfers to Minors Act

Forgetting to name alternate beneficiaries

Alternate designated beneficiaries can take the distributions if the primary beneficiaries aren’t able to accept. 

Not keeping beneficiaries up to date

This can produce problems in surprising ways. For example, if the spouse of the account owner dies first and no other beneficiaries are named, the account will go to probate upon the account owner's death. An ex-spouse can also take the funds if the account owner doesn't remarry or if the next spouse dies before the account owner does. Review the beneficiaries on your accounts and make any necessary changes.

The Bottom Line

Retirement accounts can smoothly and painlessly pass to the beneficiaries named on those accounts as long as these mistakes are avoided. Set aside time once a year to review beneficiary information to ensure that at least some of the estate passes to loved ones without the headache of probate.