Handling Beneficiary Designations

Posted on: April 8th, 2010 by

Financial Planning - Rockville, MDThe decision about how to designate beneficiaries for retirement plans, insurance policies, and other assets may seem like a very simple decision.  Chances are, you want your closest loved ones to to inherit any money you have accumulated during your lifetime, so just putting their names down on the appropriate forms should be the end of it, right?  Wrong.

You can name just about anyone or anything as your beneficiary, including individuals, charities, and trusts.  And when you name a beneficiary, those assets pass directly to whomever you designate without having to go through probate.  In addition to this though, remember that your beneficiary designations will override any bequests you have in your will.  So always make sure that your beneficiaries match up to your will.

The first common mistake people make is not re-assigning beneficiaries after they tie the knot.  There are major life events at which you should always review your beneficiaries: marriage, death, birth of children, and divorce.  Estate planners and financial advisers alike will advise that you make it a point to review assignments upon annual review of your finances to make sure that everything lines up and is copacetic.  By the same token, you’ll also want to review your beneficiary designations if you or your employer has recently changed retirement plan or insurance providers, as your beneficiaries may not carry over to the new policy automatically.

Before you make your beneficiary designations, you need to understand the tax ramifications the inheritance may cause for them.  If you are leaving your retirement plans to someone other than your spouse, you should sit down with them and an accountant and discuss how and when the money would get distributed (This will weigh heavily on the determination of the tax burden).   If you leave it to your spouse, however, they can more than likely roll it over into their own IRA and not have to pay taxes on it until the funds are distributed.  You also need to consider that leaving money to someone is considered income and you may be effecting their eligibility for government assistance if you leave them funds.  You must also keep in mind estate taxes: they will have to be paid by someone.

You also need to be very specific as to how you want your estate distributed.  You may think your beneficiary will just know what to do with your money, but they don’t.  You are, in most cases, allowed to name multiple beneficiaries and contingent beneficiaries and specify what percentage of your estate they will receive: take advantage of this.  Don’t just assume that estate planning is for the uber rich;  everyone needs a plan.



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