1. Don’t forget to name beneficiaries. Naming a beneficiary keeps you in control: at death, assets in the account are transferred to the person(s) you designate. What happens if you do not specify who the beneficiary(ies) will be?
2. Name both primary and contingent beneficiaries. It’s a good practice to name a “back up” or contingent beneficiary in case the primary beneficiary predeceases you. Again, being specific can help you avoid unintended or unwelcome results.
3. Update for life events. Review your beneficiary designations regularly and update them as needed, based on major life events such as a birth, death, marriage or divorce. Failure to update designations can result in a transfer of assets to unintended beneficiaries — or leave out someone you might have wanted to include.
4. Read the instructions. Beneficiary designation forms are not all alike. Forms and governing agreements may vary considerably between financial institutions, and for different types of assets or accounts. Don’t just quickly fill in names – be sure to read the beneficiary designation form carefully.
5. Coordinate with your will and trust. Whenever you change your will or trust, be sure to talk with your attorney about your beneficiary designations. Precisely because your beneficiary designations operate independently of your will or trust, it is important to understand how all the different parts of your estate plan work as a whole.
6. Understand potential consequences of naming individual beneficiaries for particular assets. Consider the example of someone who established three equal accounts and named a different child as beneficiary of each. Over the years, some accounts grew more than others, so some beneficiaries got more and others less — which may not be what was originally intended.
7. Avoid naming your estate as beneficiary. In most cases, this produces less-than-optimal results because it causes nonprobate assets to become subject to probate. And for IRAs and qualified retirement plans, there may be unfavorable income-tax consequences. The required minimum distribution (RMD) rules generally let an individual beneficiary “stretch” distributions over his or her life expectancy. An estate, however, has no life expectancy. And so, in most cases, taxable distributions must be made over a shorter time frame than would apply if an individual (or qualifying “look-through” trust) had been named as beneficiary.
8. Use caution when naming a trust as beneficiary. Consult your attorney or CPA before naming a trust as beneficiary for IRAs, qualified retirement plans or annuities. In many cases, the governing document (the plan document or annuity contract) or tax law (the RMD rules) may require accelerated taxable distributions when a trust is beneficiary. There are situations where it makes sense to name a trust — for example, if your beneficiaries are minor children, in second-marriage situations, or if you want to control access to funds — but be sure you understand the tax consequences in advance.
9. Be aware of tax consequences and planning opportunities. Many different types of assets can be transferred by a beneficiary designation. It’s helpful to work with an experienced tax advisor, who can help provide planning ideas that fit your particular situation. Here are some examples of beneficiary designation “fine tuning”:
10. Use disclaimers when necessary — but be careful. Sometimes a beneficiary may want to decline assets that he or she would otherwise receive. This might be motivated by estate planning considerations, income taxes, estate equalization or re-distribution, or seeking a way to “repair” an unintended result that would otherwise occur. In some cases, it is possible to achieve a different asset distribution or “fix” beneficiary designation mistakes by using a disclaimer — a legal document that lets the named beneficiary irrevocably refuse the asset. It’s important to understand that the disclaiming beneficiary cannot direct where the asset will go. Instead, when a beneficiary disclaims, the asset passes to whomever is next in line on the beneficiary form, or if there is no other named beneficiaries, to the contract defaults. Disclaimers involve complex legal and tax issues and require careful consultation with your attorney and CPA.
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Most of us think of our estate plan as our will or living trust. However, in many cases, your will or trust will not control the disposition of life insurance, annuities, IRAs, retirement plans, and many types of employee benefit plans. Instead, your beneficiary designations control who w ill receive those assets. Here are ten important considerations to keep in mind when making, reviewing, or changing your beneficiary designations.
Individual Retirement Accounts (IRAs)
Other employee benefit plans
Transfer-on-death (TOD) accounts
Beneficiary designations can have a big effect on whether your estate plan works as intended. Your financial professional can help you gather information about all of your beneficiary designations so you will be better prepared when you meet with your attorney and CPA to review your estate plan.