There are a number of assets you may have that, upon your death, will pass to your heirs pursuant to your beneficiary designations rather than the terms of your will or your other estate planning documents. A beneficiary designation is simply an account-holder’s way to legally state who will inherit certain assets that will pass outside the account-holder’s estate upon death. For example, your IRA will pass to the person(s) you listed as your primary beneficiary in the account paperwork you completed when you opened (or updated) this IRA account. If your primary beneficiary predeceases you, then, your IRA will pass to the person(s) you listed as your contingent beneficiary.
Set forth below is a list of the types of assets you may have that, upon your death, will pass in accordance with your beneficiary designations rather than what is stated in your will:
- Traditional and/or Roth IRA
- SEP and /or Simple IRA
- Transfer-on-death account
- Employer-sponsored retirement account (401(k), 403(b) and 457 plans)
- Pension plan
- Employee stock ownership (ESOP) plan
- Life insurance
- Employee benefit plans
- Stock options
- Restricted stock
- Nonqualified deferred compensation plan
- Employee stock purchase plan
- Phantom stock or stock appreciated rights
Most (if not all) of our clients have at least several of these types of accounts. Given the prevalence of these types of accounts and the large amounts of wealth that are often accumulated inside them, it makes good sense to focus not only on estate planning but also on your beneficiary designations to ensure your assets will pass where you truly want them to go and to ensure your overall estate plan works as you intended.
Set forth below are some important tips to consider:
- Make sure you have named beneficiaries for all necessary accounts . Failure to name a beneficiary can result in your assets eventually passing to someone other than your intended beneficiary. It can also delay the transfer of these assets and result in additional costs to your estate.
- Name at least one primary and one contingent beneficiary . A contingent beneficiary is essentially a “backup” beneficiary who will stand to inherit in case your primary beneficiary dies before you and you then fail to name a new primary beneficiary.
- Review your beneficiary designations following major life events such as a death, a divorce, or a birth . Failure to do so could result in unintended consequences like an ex-spouse (rather than your current spouse) inheriting your IRA or life insurance proceeds.
- Make sure your beneficiary designations coordinate with your will and trust. It makes sense to review your beneficiary designations with your estate planning attorney whenever you make any major changes to your estate plan.
- Consider the consequences when naming individual beneficiaries for specific assets. For example, consider the scenario where you open three similar accounts – one for each of your three children – and you name each child as the primary beneficiary on one of the accounts. Over time, the accounts may contain different assets and perform differently. Thus, when these accounts eventually pass in accordance with your beneficiary designations, one child may end up receiving a much larger or smaller account than his or her siblings. This may not be at all what you originally intended when you started with three fairly equal accounts. One possible way to avoid this type of scenario is to open one account and then name each of your children as an equal primary beneficiary. If this is not possible, then you could change your beneficiary designations and make each child a one-third recipient of each account in the event of your death.
- Think twice before naming your estate as a beneficiary. If you name your estate as the beneficiary of an asset that otherwise would pass outside of probate, you may inadvertently cause these non-probate assets to become subject to probate. You might also end up subjecting your estate to higher taxes. For example, if you name your estate as the beneficiary of your IRA, this might cause taxable distributions from the IRA to occur at a far faster rate than if you had named a person as your IRA beneficiary.
- Consult your attorney and/or CPA before naming your trust as a beneficiary. Although there are many instances where it makes sense to name your trust as a beneficiary (e.g. when your beneficiaries are minor children), there are certainly circumstances when doing so may accelerate taxable distributions from your assets.
- Consider rolling your 401(k) accounts from prior employers into your IRA . If you name someone other than your spouse as the beneficiary of your 401(k) or profit-sharing plan, they will only have a limited time to roll the eligible amounts in this 401(k) account into an inherited IRA. The benefit to rolling the 401(k) assets into an inherited IRA involves the ability to stretch out the required annual distributions over a longer period of time. If your beneficiary misses this rollover window, then they will be limited to the distribution options permitted by the 401(k) plan. Your beneficiary will also be limited in terms of investment options as they will only have access to the options permitted by your 401(k) plan.
- Consider naming a charity as your beneficiary on income-taxable assets like an IRA or a deferred annuity . A charity will not need to pay any taxes on any otherwise taxable distributions. However, if your will already makes provisions for charitable bequests then you should consult your attorney before naming a charity in a beneficiary designation.
Hopefully, after you read this article you will tackle the task of reviewing the beneficiary designations on all your applicable accounts to ensure they are current and appropriate. Please do not hesitate to contact us about your IRA and other similar accounts. It is very easy for us to review your beneficiary designations with you and to update them as may be needed. Also, please consider touching base with your estate planning attorney to ensure that any beneficiary changes you plan to make are appropriate given your estate plan and goals.