Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Sunday, December 13, 2009

Don’t Overlook Beneficiary Designations

Some years ago an acquaintance passed away somewhat suddenly. He had been divorced some years earlier and left behind a second wife and grown children. The survivors were surprised to learn that his IRA specified his former wife as primary beneficiary.

It is important to review all of your estate planning documents and beneficiary designations on a regular basis. At the least, this should be done whenever a significant change takes place or every couple of years. We encourage clients to keep copies of their beneficiary designations in a safe place along with their other estate planning documents. It’s not unusual for an account administrator to lose a client’s beneficiary documents.

While it is also important to name life insurance beneficiaries, for the remainder of this article we will discuss considerations related to IRA accounts. In most cases, these same considerations can apply to other retirement plans but you should be sure to double check before making changes.

Probably the worst mistake you can make is to not name any beneficiary on your account or to name your estate as the beneficiary. When no beneficiary is named at all, the retirement plan documents will determine who the beneficiary will be. IRA plans often default to the estate when no beneficiary is named. When the estate is named as beneficiary, you lose the ability to distribute the account over the life expectancies of the beneficiaries, since IRS rules require payout over five years when there is no “designated beneficiary”.

If you are married, typically the best choice for the primary beneficiary is your spouse. Spouses can roll over an IRA to their own retirement plan, thereby postponing distributions until they reach age 70 and ½, or even later if the plan is rolled over to an employer’s plan and the spouse continues working past age 70 and ½ (certain conditions must also be met). Non-spouse beneficiaries must take distributions over their fixed-term single life expectancy and must start distributions by the end of the year after the year of death of the IRA account holder.

If you are married and have a revocable living trust, it is often a good idea to designate your trust as contingent beneficiary. This gives your spouse the ability to disclaim the IRA assets, if necessary to fund the bypass trust.

If you are married and have children and have no potential estate tax issues, you will likely want to name your children as contingent beneficiaries.

If a minor is named as a beneficiary and death occurs before the minor reaches adulthood, a custodian will have to be named to manage the funds for the minor until he/she reaches age 18. Individual states laws may vary as to what is required to establish custody.

We have only scratched the surface as far as naming beneficiaries is concerned. The issues involving beneficiary designations can get quite complex. We highly recommend discussing your beneficiary designations with your estate planning attorney or financial advisor.


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