Are your Beneficiary Designations up to date?

by NEIRG NEWS | Feb 17, 2017

NEIRG Beneficiary Designations

When was the last time you checked the beneficiary designations on your retirement account?

You may find that your designated beneficiary is not who it should be, for instance if you recently got divorced, remarried or had a child you may want different allocations.  If you named a charity as your beneficiary, the charity may have changed. We typically remember to update important documents such as wills, we often neglect our retirement-account beneficiary designations. Retirement accounts aren’t part of your estate and generally not administered within the stipulations of your will. It’s important to review these retirement documents on a regular basis (such as annually) and update them upon life changes.

Outdated Beneficiary Designations

When retirement-account owners have gotten divorced and remarried but have failed to update their beneficiary designations it can be frustrating for survivors. Survivors must petition the court for a legal decisions of the true beneficiary. The court’s decision may not always be what you would have wanted.

A similar problem occurs if a child is named as the beneficiary but your account has not been updated to include those who were born later. To avoid these issues, you should review and update your beneficiary designations yearly or immediately after you experience a change in family circumstances. You can also set up a beneficiary designation to address potential situations. Such as, if your beneficiary predeceases you and you fail to update your beneficiary information. What if the charity which you planned to donate your assets closes or changes before it inherits?

There are designations you can make such as Per Stirpes or Per Capita that will make sure the distributions are handled how you intended. Per Capita designation means that in the event one of your primary beneficiaries predeceases you the other beneficiaries receive an equal split of the total account. For example, you name your children as beneficiaries, Jane, James and Joe each getting one third of the account, and Joe predeceases you. Jane and James’ share would now be one half of the account total. Per Stirpes designation means that in the event your primary beneficiary predeceases you, the share he/she would have received goes to his/her heirs. For example, you name your children as beneficiaries, Jane, James and Joe, and Joe predeceases you. Joe has two children, Joe’s share would be equally distributed to his two children.

You can also revoke your existing beneficiary designation at any time and add a new beneficiary by submitting a change-of-beneficiary form.

Default Beneficiary Options

If you don’t document your beneficiary designation, your beneficiary may be determined by federal or state law or by the plan that oversees your accounts.

For qualified plans – such as 401k plans, profit-sharing plans, money purchase pension plans – federal regulations designate the spouse of the account owner as the beneficiary. The account owner cannot dictate anyone else beneficiary unless the spouse signs a notarized document approving such a designation. If the account owner is not married, then the estate may be the default beneficiary.

State law governs the disbursement of IRAs. Few states, known as community property states, require spousal consent if the IRA account owner designates someone aside from his/her spouse as the primary beneficiary.

Individual Retirement Accounts (IRA’s and Roth IRA’s) also default the beneficiary designation if the beneficiary predeceases the account owner. The options differ among IRA custodians/trustees. While the default options relieve administrative responsibilities from the account owner, they may not be the account owner’s preference. You should check your plan to ensure that your beneficiary designations reflect your wishes.

Make Provisions for Simultaneous Death

Often time’s spouses, assuming that one will predecease the other, name one another other as their beneficiaries. The issue of simultaneous death is then addressed by state law, it will determine which spouse died first. This determination is important. Designating successor, or contingent, beneficiaries for extenuating circumstances will ensure the account owner dictates who will be the successor beneficiary.

Consider a Contingent Beneficiary Designation

If you name two people as your designated beneficiaries and one predeceases you, that share goes to the surviving beneficiary – unless you update your designations or prepare a contingent designation. You want to make sure any contingent designations state what you want to happen in the event that a beneficiary predeceases you. When planning your contingent designations, you should explore all the options to decide one that meets your needs and makes sure elections are carried over to the next generation.

Look into Trust Beneficiaries

If you want to retain control over the disposition of your assets after death, you can consider naming a trust as your beneficiary. Designating the correct type of trust as the beneficiary will allow you to provide support for your spouse while protecting children from a previous marriage financially. Determining the correct type of trust is imperative to ensure your legacy intentions are properly carried out after you’re gone and may also protect your successors from serious tax consequences. It is important that you consult with an estate planning attorney in coordination with your financial planner to determine what the best plan is for your specific situation.

Beneficiary Designation Checklist

Check the default designation of your retirement account, determine what that means for your beneficiaries if you fail to make necessary changes.
Know the tax implications for your beneficiary choices.
Keep a confirmation of designation from your account custodian or administrator with your other estate planning documentation.
If you are using a customized designation, make sure your custodian or administrator approve it. Not every institutions accepts customized designations.
Check with your institution yearly to review your beneficiary determination- make any needed changes.
Discuss with your estate planning attorney in coordination with your financial planner to determine if your designation is the one best suited to your personal situation.

If you are an existing NEIRG client with a TD Ameritrade IRA account, you can download the change of beneficiary form here.

If you are an existing NEIRG client with a Fidelity IRA account, you can download the change of beneficiary form here.