Naming beneficiaries: What to know
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Naming beneficiaries is a simple, yet impactful, piece of your estate plan. Doing so will bypass whatever is written in your Last Will and Testament or Trust Document, as the asset will transfer directly to the named beneficiaries.
Types of Beneficiaries
Assets with named beneficiaries avoid probate, reducing the cost of settling the decedent’s estate. Beneficiaries can be added to various assets, such as retirement accounts (employer-provided plans and IRAs/Roth IRAs), life insurance policies, and annuities.
When naming beneficiaries, know there is no restriction on how many you can add, and you can assign whatever percentage you would like to each. For example, you can assign 75% of your IRA to Person A and 25% to Person B upon passing.
In addition, you can name both primary and contingent beneficiaries. A primary beneficiary is the first-in-line to receive the asset, whereas a contingent beneficiary is the second-in-line, in the event the primary beneficiary predeceases you. For example, if Person A is the sole primary beneficiary of your IRA and he/she predeceases you, the IRA would automatically transfer to the contingent beneficiary at your death.
You can also designate whether the asset will be passed “per stirpes” or “per capita”. As an example, let’s say that the primary beneficiaries of your IRA are your two children, and they are to receive equal shares of the account balance at your death. If you designate each child as “per stirpes” and Child A predeceases you, Child A’s share would pass down the bloodline to their descendants. If you were to instead designate each child as “per capita”, Child A’s share would transfer to the surviving beneficiary, Child B. It is important to remember that the default is typically “per capita” if there is no specification.
Consider Unique Circumstances
Before naming beneficiaries, it is important to consider any unique circumstances:
- Minor Children: Do you want to name a minor child as a beneficiary? By law, minors cannot inherit directly. To avoid any potential hiccups, you must name a guardian for your minor child in your Will. In addition, consider working with an attorney to create a trust for the benefit of your minor child and naming the trust as beneficiary of your accounts to control the distribution of assets while your child is a minor.
- Special Needs Individual: Do you want to name a special needs individual as a beneficiary? This person might be receiving government-provided benefits, and receiving an inheritance directly could disqualify them from those benefits. You might consider working with an attorney to create a special needs trust so as not to interfere with their benefits.
Use Caution When Naming a Trust as Beneficiary
For retirement accounts, it’s important to use caution when naming a trust as a beneficiary.
It’s crucial to work with an attorney and pay close attention to the inherited IRA rules to ensure your trust qualifies as a “see-through” trust and that the language of the trust document complies with the distribution rules stemming from the SECURE Act.
If the trust meets these requirements, it would be considered a designated beneficiary. You must then consider whether the underlying beneficiary is considered an eligible beneficiary (who can stretch distributions across his/her lifetime) or an ineligible beneficiary (subject to the 10-year rule).
It’s important to note that if you fail to meet the “see-through” requirements, the trust would be considered a non-designated beneficiary, and the underlying beneficiary would be forced to distribute the entire IRA balance within five years of inheriting it.
Beware of Not Naming a Beneficiary
Life happens, and things change, which makes it even more important to review your beneficiary designations on a regular basis. Maybe your primary beneficiary predeceased you and you don’t have a contingent listed. Or, maybe you simply forgot to name a beneficiary when you opened your account.
If you were to pass away without designating a beneficiary, the asset would pay out to your estate and be subject to probate, increasing the costs of settling your estate. The assets would then pass according to the terms of your Will.
For some retirement accounts that don’t have beneficiaries listed, the custodial agreement might have default beneficiaries, such as a spouse. But often, the default beneficiary will be your estate. Depending on the age you pass away, the heir that inherits the retirement account might be required to distribute the balance within five years, which would come with some unpleasant tax ramifications.
Conclusion
Ensuring your beneficiary designations are up to date is crucial to ensuring your wishes are fulfilled. By utilizing various estate planning strategies, you can make for an efficient transfer and leave your beneficiaries in a good position, considering their unique circumstances.
Olivia Maynes, CFP, is a Financial Planning Coordinator with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Olivia at omaynes@bedelfinancial.com.