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Keep these important considerations in mind:
1. Don't forget to name beneficiaries. Assets that pass by beneficiary designation are not subject to probate. But if you fail to name a beneficiary, the asset becomes part of your probate estate.
This could delay distribution or lead to additional administrative costs.
2. Name both primary and contingent beneficiaries. It's important to name a "back up" beneficiary in case the primary beneficiary predeceases you.
Again, this is important to avoid having a non-probate asset ending up in probate.
3. Update for life events. Review your beneficiary designations regularly and update them as needed, based on a birth, death, marriage or divorce.
Failure to update designations can result in a transfer of assets to unintended beneficiaries - for example, an ex-spouse or heirs of a deceased beneficiary.
4. Coordinate with your will and trust. Whenever you change your will or trust, be sure to talk with your attorney about your beneficiary designations.
Be certain that you understand how all the different parts of your estate plan work as a whole.
5. Understand potential consequences of naming individual beneficiaries for particular assets.
Consider the example of someone who established three equal accounts and named a different child as beneficiary of each.
Over the years, some accounts grew more than others, so some beneficiaries got more and others less -which may not be what was originally intended.
6. Avoid naming your estate as beneficiary. This causes non-probate assets to become subject to probate. And for IRAs and qualified retirement plans, there may be unfavorable income tax consequences.
The required minimum distribution (RMD) rules generally let an individual beneficiary "stretch" distributions over his or her life expectancy.
An estate, however, has no life expectancy. And so, in most cases, taxable distributions must be made over a shorter time frame than would apply if an individual had been named as beneficiary.
7. Use caution when naming a trust as beneficiary. Consult your attorney or CPA before naming a trust as beneficiary for IRAs, qualified retirement plans or annuities.
In many cases, the governing document (the plan document or annuity contract) or tax law (the RMD rules) may require accelerated taxable distributions when a trust is beneficiary.
There are situations where it makes sense to name a trust - for example, if your beneficiaries are minor children or if you want to control access to funds - but be sure you understand the tax consequences in advance.
8. Explore rollover alternatives when changing jobs. Qualified retirement plans, such as a 401(k) or profit sharing plan, often require taxable distributions within one year when a participant dies and names a non-spouse as beneficiary. In contrast, IRAs often provide more flexible distribution options for non-spouse beneficiaries.
This is one of the factors you should consider when deciding whether to leave retirement funds with your employer or roll them over to your IRA.
9. Consider naming your church or a charitable organization as beneficiary.
The beneficiary of an IRA, qualified retirement plan or deferred annuity will need to pay income taxes on all, or part, of the distributions from these accounts.
But, if a qualified charity is named as beneficiary, it can take distributions without any income tax.
If your estate plan includes a bequest to charity, talk to your tax advisor about naming a charity as beneficiary of income-taxable assets.
10. Use disclaimers when necessary - but be careful. Mistakes involving beneficiary designations are often not discovered until after an account owner has died.
In some cases, it is possible to "fix" mistakes by using a disclaimer - a legal document that lets the named beneficiary refuse the asset.
When a beneficiary disclaims, the asset passes to whoever is next in line.
Disclaimers involve complex legal and tax issues and require careful consultation with your attorney and CPA.
What types of assets have beneficiary designations?
Individual Retirement Accounts (IRAs)
Retirement plans, including:
- 401(k), 403(b) and 457 plans
- SEP and SIMPLE IRAs
- Pension plans
- Employee stock ownership plans (ESOPs)
Life insurance
Annuities
Other employee benefit plans, including:
- Group term life insurance
- Stock options
- Restricted stock
- Phantom stock or stock appreciation rights (SARs)
- Employee stock purchase plans (ESPPs)
- Nonqualified deferred compensation plans
Transfer-on-death (TOD) accounts
As you can see, beneficiary designations can have a big effect on whether your estate plan works as intended.
Your Financial Advisor can help you gather information about all your beneficiary designations so you will be better prepared when you meet with your attorney and CPA to review your estate plan.
Brian is a commission-based Financial Advisor and Registered Representative, as well as a fee-based Investment Advisor Representative with over 25 years of industry experience.
He is licensed to assist you with your investment, retirement plans, life insurance, variable life insurance, fixed and variable annuities. Brian can be reached at Bank Iowa Investment Center, 712-246-1311.
Note: Securities offered through IBA Securities, a division of Broker Dealer Financial Services Corp., Member FINRA & SIPC. Not FDIC insured, no bank guarantee and principal may lose value.
