Beneficiaries

I’m sure most of you are glad the tax filing deadline has come and gone, although I suspect there are plenty of you that have postponed the inevitable with an extension.  Either way, just getting through the April deadline seems to remove much of the anxiety surrounding taxes in general and can allow us to think about other important planning issues that need to be considered as well.

We haven’t written about this in several years, and we continue to hear about circumstances that could easily be avoided with some simple planning.  I just wanted to quickly remind you all about reviewing beneficiary designations and provide some simple guidelines to consider.

Understanding how assets transfer at death helps you create an estate plan that ultimately fulfills your wishes, but can also prevent unnecessary delays or outright headaches for your heirs.  We would recommend reviewing all beneficiary designations on qualified plans (401k, 403(b), IRAs), insurance policies, and annuities at least every 3 years or at any major life event (marriage, divorce, death or new birth) to make sure these designations carry out what you desire.

Assets are generally transferred in the following ways:

  1. Ownership – Certain assets that are held jointly automatically go to the surviving owner.
  2. Beneficiary designation – Assets pass to the person(s) or entity designated as the beneficiary on certain contracts or accounts.
  3. Trust – Assets transfer according to the terms of the trust.
  4. Will – Assets that are not transferred by any of the above 3 methods will be distributed according to the terms of your will. If you don’t have a will, assets will then transfer according to the laws of your state.

Frequently asked questions regarding beneficiary designations include:

  1. I have a current will. Isn’t that enough?  No.  Regardless of what your will says and as current as it may be, beneficiary designations supersede anything in your will.  For example, you update your will but leave an ex-spouse as beneficiary on your IRA or 401k.  The beneficiary designation is more important than the will and may not reflect your current wishes if circumstances have changed.
  2. Do I need contingent beneficiaries? It is not required, but it is an excellent idea.  If you haven’t named a contingent beneficiary and your primary dies before you, or at the same time, the assets will be distributed according to the rules in your retirement plan or IRA upon your death.
  3. Can I name a beneficiary who is not my spouse? Yes, however, some plans do require spousal consent in that situation.  Also, keep in mind that some non-spousal beneficiaries may have different options available to them when they inherit assets.
  4. Can I name a trust as beneficiary? Absolutely, however, be careful.  Naming a trust as beneficiary can give you flexibility for overseeing the distribution of assets, but it can also impact taxes and how mandatory minimum distributions are taken out of retirement accounts.
  5. Can I create a beneficiary for non-qualified accounts that don’t normally have a beneficiary designation? Yes, this is most common with brokerage accounts or bank accounts.  The most common method is to include TOD (transfer on death) instructions.  This does not create joint ownership on the account but does provide for direction of where the assets go without having to probate the assets.

This list certainly does not exhaust all the questions and planning opportunities that surround the issue, however, what is key is that it is considered and reviewed on a regular basis.  As mentioned earlier, if you haven’t recently reviewed all the beneficiaries on your current or former employer’s retirement accounts, IRA’s, insurance products, annuities, and after tax account with TOD instructions, I encourage you to take the time soon as this can be a much bigger issue than an annual tax return.