The Right Beneficiary

Annually review your beneficiary choices to keep your retirement and estate plans on track.

Here’s a simple financial question: who is listed as the beneficiary of your Individual Retirement Account (IRA)? How about your 401(k) retirement plan, life insurance policy, Health Savings Account (HSA), or annuity? You may be able to answer easily, or you might be unsure. Regardless, it’s smart to periodically review those designated beneficiaries.

Your beneficiary can be your spouse, your child, another loved one, or one or more organizations. Most accounts allow multiple beneficiaries, and you can choose different beneficiaries for each account. In addition, you may be able to choose contingent beneficiaries in the event that a beneficiary predeceases you.


Your choices may change with time.

When did you open your IRA or buy your life insurance policy? Was it back in the eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit? How about your family?

While your beneficiary choices may seem obvious when you make them, time has a way of altering things. Over a stretch of five or ten years, major life changes can occur – and these may warrant changes in your beneficiary decisions.

In fact, it may be wise to review your beneficiary choices as part of an annual financial review. It can be as easy as checking the profile information in each of your online bank, brokerage, and insurance accounts. Setting a regular schedule will help you to catch any paperwork errors and ensure that your estate plan stays up-to-date and incorporates the major changes that happen in your life.


Your decisions will affect your loved ones.

If you haven’t designated a beneficiary for each account, annuity, and insurance plan, some of your assets may go to the “default” beneficiary when you pass away. Bequests made in a will or living trust won’t always take precedence over the most recent beneficiary designations on your life insurance or retirement plans -- even if those designations are outdated. These types of issues can throw a wrench into your plans for your estate.1

For example, if an estranged child or an ex-spouse is still listed as the beneficiary on your life insurance policy or your IRA, that person is in line to receive the death benefit when you die, regardless of what your will states.2


You may have chosen the “smartest financial mind” in your family as your beneficiary, relying on that person to carry out your financial wishes in the event of your death. But have you considered the tax consequences for that beneficiary? 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?

Consider the financial consequences for your loved ones if you pass away. Your spouse or another family member or friend may have bills coming due or expenses related to your death. In these situations, because the tax-free death benefit will transfer automatically to your named beneficiary without going through probate, a life insurance policy can provide a source of ready cash.3

In contrast, the person named as the beneficiary on your IRA or 401(k) may face tax burdens and may need to make consequential decisions about these funds which will affect their own estate.4 It may be wise to consider setting up a trust to manage these assets, especially if the beneficiary is young. The recent SECURE Act has changed the rules governing inheritance of certain assets.5


Be aware of the financial consequences of your estate plan.

Designating your spouse as your beneficiary will likely minimize the tax consequences. Only six states impose an inheritance tax, and spouses -- including same-sex spouses -- are exempt from it.6 And joint titles that bestow rights of survivorship make it possible to transfer ownership of an asset to a surviving spouse without going through probate.7

When the beneficiary isn’t your spouse, things get a little more complicated, both for your estate and for your beneficiary’s estate. A non-spouse beneficiary who inherits your retirement plan, for instance, will need to choose among several options for distribution of those assets, each with different financial implications.8

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.9

If you are not sure how an inheritance will affect your chosen beneficiaries, then you may not be making the choices that are best for them. Having a conversation with them before you die can help them to be better prepared to manage inherited assets, can lead you to adjust your plan so it will have a better impact, and can make it more likely that your wishes will be carried out as you intended.10


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