Retirement Plan Beneficiary Designations

May 05, 2014

shutterstock_96898810Have you double checked your beneficiary designations lately? Do you know who your beneficiaries are?

Before you file away those year-end statements, take the time to verify your beneficiary designations. Sure you are saying to yourself, I know who I wrote down on the form when I filled out all the account paperwork. Or at least you think you know. How long has it been since you enrolled in your employer’s retirement plan? When, exactly did you purchase that life insurance policy, open your IRA at the brokerage firm or mutual fund? You probably haven’t given it much thought since then so a periodic review is a wise move.

Why is it so important? One of the most common misconceptions is that everything you own will pass according to the terms outlined in your will. However, beneficiary designations on life insurance contracts and retirement plan accounts take legal precedence over any wishes you might express in your will. Further, some state laws control succession if a named beneficiary predeceases you or a will is contested.

You work hard and have diligently saved over the year and your retirement accounts may be among your largest assets. So while you may have taken a lot of time discussing with your attorney exactly how you want your assets distributed after your death, it could all be for nothing as far as these particular assets are concerned.

Part of your overall Estate Plan Proper beneficiary designations should be integrated into your overall estate plan.

If your marital status has changed since you first filled out the paperwork, have you timely updated the beneficiary forms? Or will your ex-spouse be pleasantly surprised to learn he/she has just experienced a financial windfall from you?  If  you  have welcomed a new baby into your life or you are now part of a blended family, you would not want to have some of your children receive assets from your estate while others are accidentally left out.

If you wish to bequeath assets to friends and relatives who are not immediate family members, beneficiary designations may serve the purpose. Most states have laws governing the rules of succession, but these generally don’t provide for individuals outside the immediate, legally recognized family. Naming charitable beneficiaries could help avoid income taxes on the benefits. Your estate plan might benefit by leaving nontaxable assets to your family members and retirement assets to your favorite charity.

Assets with designated beneficiaries generally pass immediately, outside the probate process. This affords the beneficiaries a degree of privacy and ready liquidity. Also, the ability to “stretch” the benefit payouts over a beneficiary’s lifetime could be important. If you’re leaving IRA money to a child or grandchild, this benefit could be substantial-allowing tax deferred growth to continue for many years.

My Plan Custodian Has My Beneficiary Designations on File Don’t be so sure! Over the past few years, there have been numerous mergers, acquisitions and re-locations. Often, back office functions have been combined, moved or downsized. Unfortunately, adequate recordkeeping sometimes does not survive these changes. Experience has shown that occasionally the signed forms are nowhere to be found. Where there is no record on file of the designated beneficiary, trustees usually have default beneficiaries in the account agreement. These might not be who you had in mind! Our suggestion: Ask for a written copy! Keep the copy among your most important papers.

After a lifetime of planning, saving and investing, making the effort to assure your beneficiary designations are in order may provide you with the comfort of knowing that your wishes will be carried out after your death and your loved ones can reap the benefits you intended.

By: George Monger, CPA

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