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Are Your Beneficiary Designations Up to Date?

Smart Financial > Blog > Are Your Beneficiary Designations Up to Date?

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), annuities, or life insurance policies? You may be saying, “I’m not sure.” It is smart to periodically review your beneficiary designations.

 

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Nineties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed?

 

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life and may warrant changes in your beneficiary decisions.

 

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your retirement accounts, those assets may go to the “default” beneficiaries when you pass away, which might throw a wrench into your estate planning. An example: under ERISA, your spouse receives your 401(k) assets if you pass away. Your spouse must waive that privilege in writing for those assets to go to your children instead.1

 

How your choices impact taxes. If you have named non-spouse beneficiaries and have retirement group plans like 401(k)s, or a 403(b)s you many want to consider rolling your assets over into an IRA. When an employee or former employee passes and has qualified retirement plans all non-spouse beneficiaries are required to distribute the account over five-years. By rolling the assets into an IRA you will allow your non-spouse beneficiaries the flexibility to stretch Required Minimum Distributions out over their lifetime instead of being forced to withdraw the account value in a five-year span.

 

If your account is in a IRA or Roth IRA and you are looking to name your trust as the beneficiary, remember trust and estate taxes are typically in a higher tax bracket than individuals who are married filing jointly or single. If you have assets in one of these qualified accounts, you should consider naming individuals as your beneficiaries. This will allow the assets to be in a lower tax bracket when they are distributed, and your beneficiaries will still be able to stretch Required Minimum Distributions over their lifetime.

 

 

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k), or life insurance policy may be your spouse, your child, maybe another loved one, or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

 

Many people do not realize that beneficiary designations take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she will receive the death benefit when you die, regardless of what your will states.2

 

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets?

 

How your choices affect your estate. If you are naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.3

 

When the beneficiary isn’t your spouse, things get a little more complicated – for your estate and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of their taxable estate, and their heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday and pay the required taxes on that income.4

 

If you properly designate a charity or other 501(c)(3) non-profit organization as a beneficiary of your retirement account assets, the assets can pass to the charity without your estate being taxed, and the gift will be deductible for estate tax purposes.5

 

If you are an existing client and would like to verify your beneficiaries, or would like help updated your beneficiaries, please give our office a call and Ariana would be happy to help you! If you are interested in learning more about how to strategically set up your beneficiaries or are looking to name a charity or a non-profit organization as a beneficiary let us know and we would love to share how those tax advantages work.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

 

Citations.

1 – forbes.com/sites/ashleaebeling/2018/01/08/five-retirement-housekeeping-moves-for-the-new-year/ [1/8/18]

2 – thebalance.com/why-beneficiary-designations-override-your-will-2388824 [8/28/17]

3 – nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [2/4/18]

4 – corporate.findlaw.com/law-library/who-should-be-the-beneficiary-of-your-qualified-retirement-plan.html [2/4/18]

5 – ameriprise.com/research-market-insights/financial-articles/insurance-estate-planning/charitable-giving/ [2/4/18]

 

Investment advisory services offered through Capital Asset Advisory Services, LLC., a registered investment advisor. Not associated with or endorsed by the Social Security Administration or any other government agency. Smart Financial does not offer legal or tax advice. Please consult the appropriate professional regarding our individual circumstance.

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