When Was the Last Time You Checked Beneficiary Designations?

It happens all the time: ex-spouses get a nice surprise when no one remembered to update beneficiary designations. Don’t be that person!

This is perhaps the single simplest estate planning error. It is also the one that is the easiest to fix: check your beneficiary designations on any assets with a designated beneficiary. Although it is very simple, but you’d be amazed at how many times an ex-spouse, distant relative or the IRS ends up with the asset. Your will does not override the designation, so don’t expect your will to fix the mistake.

The Chicago Tribune gives us five things to know about naming beneficiaries on retirement plans and insurance policies in “Who will get your money when you’re gone? Some things to know.”

You can have a “do-over.” The owner of an account or policy can change the beneficiary any time they want by contacting the plan administrator or life insurance company. To be safe, name a contingent beneficiary as a second in the event that your named beneficiary has died.

Taxes. The tax implications for beneficiaries vary. Life insurance proceeds are received by the beneficiary without tax liability after he or she submits proof of death, but the death benefit will be counted for potential estate taxation depending on the overall value of your estate. The money received by an IRA beneficiary is subject to a number of options, like a rollover, based on whether the beneficiary is the spouse or someone else. These choices can affect the taxes to be paid when money is withdrawn from the retirement account.

Friends are OK. The beneficiary doesn’t have to be a relative. You could select a friend or a charity. However, if you name an individual as beneficiary of a retirement plan, it’s important tax-wise that the beneficiary understands NOT to make an immediate withdrawal from a retirement plan. Depending on the age of the person who died, and whether or not the beneficiary is a spouse, there are several decisions about rolling the account into another IRA that should be made to keep the money growing tax-deferred or tax-free in a Roth. Each decision will have distinct tax and withdrawal implications for the beneficiary.

No kiddies! Don’t name a minor as a beneficiary of a life insurance policy or a retirement account because it will usually result in a court-ordered trustee being appointed. He or she would have the authority to make distributions, which might not be what you wanted. If you want your young children to be beneficiaries, talk to an experienced estate planning attorney and create a trust as beneficiary. You can designate the trustee of your choice and include payout instructions.

Surprise! It’s totally your decision whether to tell your beneficiary that he or she will receive money at your death. However, if you designate an institution or charity as the beneficiary, you need to obtain the proper forms and instructions to do this correctly.

Just imagine the look on your current spouse’s face when he or she learns that you did not update the beneficiary designation and a distant cousin or your ex is going to reap a huge windfall upon your death. That should be enough motivation for you to get this one done.

Reference: Chicago Tribune (January 6, 2017) “Who will get your money when you’re gone? Some things to know.”