Have You Reviewed Your Beneficiary Designations Lately?

| December 31, 2013 | 0 Comments

When was the last time you reviewed the beneficiaries for your retirement accounts and insurance policies? When you open a retirement account or buy an insurance policy, part of the process is determining who will receive the assets when you pass away: your beneficiary. Unfortunately, many people never review those choices, even when life changes. Failure to keep your beneficiary choices up to date can have serious consequences.

The benefits of naming a beneficiary. Starting with the basics, the most obvious benefit is control: deciding who will receive your assets when you’re done with them. Failing to name a beneficiary doesn’t mean nobody will receive your assets; it just means you won’t have any input on the decision.

The next benefit is more complex, especially for retirement accounts. Generally speaking, when you name a person such as a spouse, children, relative, or friend, there can be significant tax advantages. Once someone passes away, their retirement accounts must generally be distributed (as taxable income) over a certain period of time. If the beneficiary of those accounts is a person, that time could be as long as their life expectancy, which is called “stretching” the distribution. If a charity, trust or entity (like your estate) is the beneficiary, or if a person isn’t specifically named, then the time frame could be as short as five years. By naming a person, you should be able to let the assets grow tax-deferred in the retirement account for a lot longer. This can be especially beneficial for younger heirs.

The final benefit is cost. By failing to name a beneficiary, the retirement account or insurance policy may be dumped into probate so that a court can figure out what to do with the assets. This is a complex process that costs money.
Have you named a beneficiary? Many IRA or 401(k) owners leave their beneficiary forms blank when they first open their accounts. The companies that manage these accounts may name your spouse as beneficiary by default if the form is left blank, but that’s not guaranteed.

Can you find your beneficiary forms? If your heirs can’t find the proper beneficiary form following your death, the account will likely pass to your estate and your beneficiaries may lose the ability to stretch the distributions. The financial institution where the account is held should have the form, but paperwork can be lost. You can avoid this by calling each institution and asking them to send you a copy of your current beneficiary designations. If they can’t find it, ask them to send you a new form. Once you’ve found your old forms, or filled out new ones, keep a copy with your estate documents. You should probably have a copy away from your home as well, such as with your estate attorney and your executor.

Are your beneficiary choices current? We often see parents or ex-spouses listed as beneficiaries, even when the family situation has changed. Review your beneficiary choices to ensure they are still consistent with your estate plan and with your life goals.

Have you named a contingent beneficiary? Most people should designate a back-up, or contingent beneficiary to receive the account if your primary beneficiary is not alive. If there are multiple heirs, such as children or grandchildren, you may have to attach a letter of instruction to the form stating how you want the account’s assets distributed. Also, if one of your heirs dies out of turn, you should make clear whether that heir’s share of the IRA goes to your other heirs – “per capita” – or to the designated heir’s descendants – “per stirpes” (e.g.: your child’s children). Few forms make this election easy, but it can be very important.

Choosing your beneficiary(ies) is an essential part of your estate plan, and these choices should be reviewed periodically, just like your wills, trusts and other documents.

This column is prepared by Rick Brooks, CFA, CFP®. Rick is Vice President for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management. Rick can be reached at (858) 755-5166, or by email at brooks@bfadvisers.com. Rick and his family live in Mission Hills.

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