Who do you want your money to go to? What are your intentions and wishes for your money should be spent? These are just two of the questions that can and should be answered by your designated beneficiaries.
You as the account owner choose one or more beneficiaries to receive all or a portion of the accounts assets upon the your death. The beneficiary can be an individual or entity (trust or charity) and is split in specific percentages determined by you.
It is important to consider the designated beneficiary for tax, estate, and probate reasons. There are specific rules and wording that is required to make sure your wishes are enacted in a timely and smooth manner. Here are some key considerations when filling out your beneficiary forms for company retirement plans, life insurance, IRAs and other assets.
When you name a beneficiary, those assets go directly to the designated person and do not go through probate court. This is helpful to surviving family members so that they can keep paying bills and won’t be forced to sell prized or depressed assets.
Beneficiary designations have a higher standing than instructions in your will. For instance, if your life insurance policy names your daughter as beneficiary but for some reason you have in your will that your son will receive the life insurance, the money will go to your daughter. So, make sure your beneficiary forms are up to date and match your wishes at that time. With that in mind, it is important to review beneficiary designations at least annually or as major life events occur. Changes or additions to testamentary trusts, relocating, change of job, etc. all can require updates to your beneficiary forms.
Taxes: Right now, the federal government charges taxes on estates above $5 million for individuals or $10 million for married couples. As of right now, this tax law is only in place through 2012. Individual states have their own estate tax rules that you have to be mindful of. If you designate a beneficiary other than your spouse to receive assets, that amount will be included in your estate. Once distributed, the beneficiary will pay taxes in the same manner (either capital gains or interest income) as the previous owner.
Retirement Plans
With all retirement plans it is best to have a primary and contingent beneficiary. This way you will direct who receives your assets instead of having a judge determine the outcome. If you have minor children, it is wise to set up a testamentary trust. To make sure the trust is funded with your money, ask your attorney for the specific phrasing to write on your beneficiary form.
Roth IRAs: At death, IRA minimum distribution rules apply and the Roth IRA must be distributed within 5 years of the owner’s death if no beneficiary is designated. However, if there is a designated beneficiary, distributions may be over the life expectancy of the designated beneficiary and must commence before the end of the calendar year following the year of the owner’s death. If the sole designated beneficiary is the owner’s surviving spouse, the spouse may treat the Roth IRA as his or her own and not take distributions.
401(k): By law, the current spouse is to receive assets inside a 401(k) upon death. If you wish to have someone other than your living spouse be the beneficiary of your account, they will have to sign a form allowing someone else to be the beneficiary. If you remarry and want your kids from the first marriage to receive the money, your second spouse will need to sign the release form.
