A
substantial portion of a person’s assets may be governed by beneficiary
designations rather than by the terms of that person's Will. It
is important to pay careful attention to beneficiary designations to
make sure, in the event of your death, that your property is distributed
according to your wishes.
Determine which of your assets are governed by beneficiary designations.
Retirement plans (IRAs, etc.) and life insurance
policies are the most common examples of assets governed by beneficiary
designations, and it is these two asset types to which this
Legal Moment is directed.
[i]
Do you know who your current beneficiaries are?
Most people think they know who they have designated as
their beneficiaries but, upon checking with their retirement plans or
life insurance companies, some find they are mistaken. This is
especially true when it comes to designations of contingent
beneficiaries (the beneficiary named in case the primary beneficiary is
predeceased). Mistakes in designating primary beneficiaries also
occur from time to time.
Aside from the principal problem of assets not going to the
intended beneficiary, for tax-qualified retirement plans like
traditional IRAs, there can be hefty negative income tax consequences
where no beneficiary is named — advantageous stretch-out periods for
distributions may be lost.
Who should you name as beneficiaries?
Beneficiary designations should be consistent with your
overall estate plan and dispositive wishes. For retirement plans,
moreover, attention should be paid to the income tax implications of the
designations. For example, spouses typically name each other as
primary beneficiary of their retirement plans — and this is often the
optimal choice in terms of income tax impact. But beyond that,
there is little generalization to be made and each individual situation
should be carefully examined.
Although life insurance designations are not generally subject to the
income tax considerations of retirement plans, there are a number of
other, non-tax beneficiary designation issues that warrant careful
attention (e.g., avoidance of property passing to minors; making sure
property would pass as desired under various potential scenarios).
For example, if you name your two children as beneficiaries, what
happens if one of those children predeceases you? Do you want that
child’s portion to go to his or her children (your grandchildren), or
do you intend that the policy proceeds all go to your surviving
child? The difference in outcomes hinges on the particular
language contained in your beneficiary designation and/or the language
of your insurance or retirement plan contract.
Should you name your revocable trust as a beneficiary?
A revocable trust is often a good beneficiary choice for
life insurance policies. In certain situations, a revocable trust
may be an appropriate choice for retirement plans, but because of income
tax considerations, it may be preferable to name individual
beneficiaries instead. This is a complicated issue which does not
lend itself to generalizations, and you should discuss this strategy
with your estate planning professional.
When should beneficiary designations be reviewed?
The following is a list of recommended times for review of your beneficiary designations:
- At the death of a spouse or at the death of another family member or other person named as a beneficiary;
- When you have a change in your marital, partner, or other relevant relationship;
- When you have a change in your dispositive wishes—that is, a change regarding who it is you want to receive your assets;
- When you are executing new estate planning documents;
- When it has been awhile since you reviewed your designations; and
- Now.
How do you review your designations?
To check who is currently named as your primary and
contingent beneficiaries, contact the custodian of your IRAs, the plan
administrator of other retirement plans, and your life insurance
companies. Where multiple individuals are named as primary or
contingent beneficiaries, carefully review what happens if one of those
individuals predeceases you. Changing your beneficiary
designations is a matter of filling out “Change of Beneficiary” forms
typically provided by the companies and plans with which you are doing
business. After you make the change, it is advisable to request written
confirmation from those companies that your requested change is in
effect.
The foregoing is a very simplified discussion of
beneficiary designations, intended only to highlight the importance of
paying attention to beneficiary designations to ensure they are
up-to-date and reflect your wishes. Many factors can affect the
determination of these wishes, including the income tax considerations
for retirement plans, and you should consult with your estate planning
professional for recommendations with respect to your particular
situation.
If you are interested in making charitable bequests, please see an earlier
Legal Moment article about the potential tax benefits of naming charities as beneficiaries of tax-qualified retirement plans
.
[i]Other
types of assets can also have beneficiary designations but those types
are beyond the scope of this article. Look for a discussion of
“POD” (“Payable on Death”) and “TOD” (“Transfer on Death”) designations
on bank accounts and other assets in a future
Legal Moment.
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