Beneficiary selection plays a vital role in your estate management strategy. Regularly reviewing your beneficiary designations (particularly after significant life changes like marriage, divorce, the birth of a child, or the death of a family member) supports your long-term goals and can help your loved ones navigate future legal hurdles. Whether you’re setting things up for the first time or reassessing your current arrangements, understanding beneficiary designations is a cornerstone of your legacy. Let’s take a closer look.
What is a beneficiary? A beneficiary is a person or entity you legally appoint to receive all or part of your financial assets upon your death. You have the power to choofse beneficiaries for all types of accounts and assets. Familiarizing yourself with the various types of beneficiaries can assure a smooth transfer of assets from your estate. Naming a beneficiary is akin to writing a contract. It’s important to note that, should there be a discrepancy, beneficiary designations on individual accounts will take precedence over any specified in your will.1
Understanding beneficiary designations. Before selecting beneficiaries for your accounts, it’s helpful to review how these designations function across different accounts.
- Retirement accounts. Beneficiary designations on retirement accounts override any other instructions, including those in your will. If your will names your spouse as the beneficiary, but the plan lists your children as beneficiaries, your children will inherit. If there are no designated beneficiaries, your assets will automatically pass to your spouse (if married at the time of death) or to your estate (if unmarried). Beneficiaries you name on retirement accounts will not apply to nonretirement accounts.1
- Nonretirement accounts. When considering beneficiaries for other types of accounts, consider your overall estate strategy. Depending on previous decisions, it may not be necessary to name specific beneficiaries for these accounts. We usually mean securities accounts, bank accounts, life insurance contracts, and investment partnerships. Consulting an estate attorney can help you gain insight into your unique situation.1
Understanding types of beneficiaries. Understanding the types of beneficiaries can help you distribute your assets in accordance with your intentions and wishes. There are two types to choose from:
- Primary beneficiary: The first choice of person, entity, or institution designated to receive assets upon your death. They have the first claim to your assets as specified in your beneficiary designation. You have several options:
- One or more individuals (family members, friends, loved ones)
- One or more charitable organizations
- A trust
- Your estate
- Contingent beneficiaries. Naming both primary and contingent beneficiaries can be important. Contingent or “secondary” beneficiaries inherit assets only if all primary beneficiaries are deceased, unlocatable, or refuse the inheritance. Keep these points in mind:
- In some instances, you can name multiple contingent beneficiaries and assign different percentages.
- They can be individuals, charities, or your estate.
- Different accounts can have different contingent beneficiaries.
- You should name an ultimate recipient if your other choices are limited.
Choosing beneficiaries. Choosing is a deeply personal decision shaped by various factors, including relationships, family dynamics, and your overall financial objectives. Each account comes with its own set of rules, so we should review each one thoughtfully. We understand that this decision can be a complex matter. As you navigate this process, here are some key points to consider:
- Relationship and family dynamics: Consider how your choices might affect family relationships. For example, naming one child as a beneficiary of a retirement account and not others could cause resentment. Be ready for open discussions with your family to explain your reasoning.
- Think per stirpes -- automatically by blood relationship or per capita–to those named only, related or not.
- Tax implications: Understand tax impacts on different beneficiaries, which vary by account type and relationship. A spouse inheriting a traditional IRA has more flexible options than a non-spouse who may be required to withdraw funds within 10 years and pay taxes on them. Leaving tax-deferred accounts to a qualified charity has different consequences, as these organizations are exempt from paying income tax on distributions.
- Contingent beneficiaries: Naming secondary beneficiaries allows assets to pass according to your wishes if the primary beneficiary is unable or unwilling to inherit.
- Changes in life circumstances: Life events such as marriage, divorce, or the birth of a child may influence your choices. We should regularly review and update beneficiaries to make sure they accurately reflect your current wishes.
Whether your circumstances have changed, you’re having second thoughts, or something unforeseen has come up, it’s wise to review your beneficiary designations periodically. We're happy to help. Just reach out anytime.
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Note Bene:This information is not a replacement for individualized advice. Consult with us and your tax, legal, and accounting professionals before modifying your inheritance strategy. Remember that once you reach age 73, you must begin taking the required minimum distributions from a traditional IRA. Withdrawals from tax-deferred plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10 percent federal income tax penalty. Assets paid to your estate may incur extra expenses.