What You Need to Know About Beneficiary Designations
Courtesy Dorsey & Company, Inc., New Orleans LIVING WELL Magazine
When you think about estate planning, the first thing that may come to mind is your will or living trust. However, while these are valuable documents, they do not have any effect on the distribution of many of your important assets. Your beneficiary designations are the element that ultimately controls who receives these assets. To help you in deciding how to make these important decisions, the following are a few points to consider.
1. Update for life events. You should get in the habit of reviewing your beneficiary designations regularly, and update them as needed. Life events such as a birth, death, marriage or divorce are good reminders to check on them.
2. Evaluate changes to wills and trusts. Any time you make changes to your will or trust, you may also need to make changes to your beneficiary designations. Updating the two at the same time will help you keep both current.
3. Name contingent beneficiaries. Having a beneficiary is an important first step, but what happens if that person precedes you in death? Your assets would become part of your estate and distribution of those assets may be delayed if you don’t have a backup beneficiary named as well.
4. “Per Stirpes” beneficiary designation. Inquire of your legal or financial advisor about “per stirpes” beneficiary designations. A per stirpes designation means that if a named beneficiary dies before you, upon your death, the predeceased beneficiary’s share will pass to his or her heirs.
5. Avoid estate as beneficiary. Naming your estate as beneficiary is always an option, but doing so will subject it to the time constraints and fees associated with probate. Additionally, if you have IRAs or qualified retirement plans, there may be adverse income tax consequences to such an arrangement.
6. Use caution when naming a trust as a beneficiary. Before naming a trust as the beneficiary for any of your assets, you should seek professional advice first. If your beneficiaries are minors or if you want to control access to funds, it could make sense to name a trust as a beneficiary. But special income tax considerations do apply if you decide to name a trust as beneficiary of an IRA, a qualified retirement plan, or an annuity, so it’s important you understand all the details involved.
7. Designate charitable organizations as a beneficiary. You may be able to eliminate potential income and estate taxes associated with certain types of assets if you designate one or more of your favorite charities as a beneficiary, and you’ll have the satisfaction of knowing they will be used to support a good cause you believe in.
8. Examine plan documents. If you have assets such as 401(k), 403(b) or other qualified retirement plans, you should know that they are governed by plan documents. Each one differs with regard to permissible distributions on the death of a plan participant, and in some cases greater flexibility may be given to a spousal beneficiary as opposed to a non-spouse beneficiary.
9. Think about lump sum distributions. In some cases, assets with beneficiary designations pay out death benefits as one lump sum. As a result, you should decide whether or not you’re comfortable with your beneficiary receiving a lump sum, versus receiving monthly payments or having a rollover option. You should also factor inflation and taxes into your decision.
10. Explore alternatives when changing jobs. A job change may affect the choices you have available to you with regard to beneficiary designations. When faced with such a change, you should explore various options, which may include rolling the assets into an IRA, moving them to your new employer, or leaving them with your old employer.
11. Use disclaimers if necessary. Mistakes regarding beneficiary designations often go undiscovered until after an account owner has died. Sometimes it’s possible to fix mistakes by using a disclaimer — a legal document that lets the named beneficiary refuse the asset. Because of the complex legal and tax issues involved, disclaimers should be made only after careful consultation with an attorney and CPA.
Dorsey & Company, Inc. has been serving Louisiana Investors since 1959.
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Our firm is not a legal or tax advisor.
