Beneficiary Designations – What You Need to Know

Beneficiary designations are so important. You’ve set up accounts for estate and retirement planning, paid your dues, and you want to be sure that the right person is left these accounts. Sometimes, you might not even know about designations for certain accounts, so this is an article that we think can help a lot of you that trust in our Secure Your Retirement podcast.

If you haven’t subscribed to our podcast already, we highly recommend you do here.

In this episode, we’re going to cover everything you need to think about, including:

• Beneficiary designations
• Taxes
• More 

Beneficiary Designations 101

First, it’s important to know which accounts are almost required to have a beneficiary. These accounts include:

• 401(k)
• 403(B)
• IRA
• Life insurance
• Etc.

These accounts will often require a beneficiary or a person to who you want the account to go to upon your demise. You’ll be able to choose a primary and contingent beneficiary, too.

Retirement accounts are the most common accounts that need beneficiaries.

Other accounts that you should add beneficiaries to include:

• Brokerage accounts
• Bank account
• Savings account

You may find a name other than the beneficiary, such as “transfer on death,” and you should be filling these out.

What is a Primary and Contingent Beneficiary?

Primary and contingent beneficiaries were mentioned previously. What do these things mean?

• A primary beneficiary is the main person who would gain control of these accounts upon your demise.
• Contingent beneficiaries are the person(s) who will receive the account if the primary beneficiary isn’t alive.

You can even have multiple beneficiaries, all of which will receive a percentage of the account. For example, you can have four beneficiaries, all of which receive 25% of the assets in the account, or whatever percentage that you choose.

What Happens If You Don’t Have a Beneficiary?

When no one is listed on your accounts as a beneficiary or the only person listed is no longer alive, the account will go to your estate. The problem with the account going to the estate is that a large chunk of the money will be lost to upfront taxes.

Instead, if a beneficiary receives the money, they can leverage tax strategies to save money.

Gaining Greater Control Over the Money

You can gain greater control of the funds and the way they’re transferred by using certain designations. Thankfully, there are only two that you really need to know about:

• Per Capita: The default on beneficiaries. For example, if you have two primary beneficiaries with 50% of each asset divided equally among the two. If one beneficiary dies, all of the money will go to person number two as your primary beneficiary. The shares of a beneficiary that is no longer living is split equally among all primary beneficiaries listed, no matter how many there may be.
• Per Stirpes: You can also choose per stirpes. A powerful and useful tool, this means that the assets will go down your lineage. So, if you have two people as beneficiaries and the first beneficiary dies, the funds they would receive will go to the next person in their lineage. So, the money would go to the person’s kids instead of the remaining beneficiary.

As you can see, designations when adding beneficiaries are very powerful tools that can help you gain greater control over who receives your assets.

Many clients of ours are concerned about the future and their assets. For example, many of our clients ask, “What happens if a grandchild is born?” Using per stirpes, the assets will include them in your lineage.

For example, let’s assume that you have a son, and they have a child. The child automatically becomes part of the per stirpes designation. 

Most people will list their spouses as a primary and their children as contingents on their accounts because it’s a way to ensure assets are passed on to the people you care about the most.

Power of Per Stripes Example

Let’s assume that you have passed away, and you have a substantial amount of money in an IRA or 401(k). You might also leave money to your son or daughter, who is a good income earner. Due to their high income, per stirpes can be very beneficial.

Why?

Your children can disclaim their inheritance to allow it to flow down to your grandchildren.

Why is this beneficial?

If the grandkids don’t have large incomes or maybe are even too young to work, they’ll be in a much lower income bracket than someone who is a high earner. In this scenario, more of the money will go to your family and less will go to the government for taxes.

But the per stirpes designation must be present for this to work.

Annual Beneficiary Review

Conducting an annual beneficiary review is something we recommend all of our clients do, and we highly recommend that you do a review, too. The main reason for a review is that it’s just too easy to forget about beneficiary changes.

You may have been divorced, a beneficiary died, or you may have been married.

Annual beneficiary reviews will ensure that the right people benefit from the assets you leave behind.

We have a story of someone who divorced, then remarried.  The beneficiary was never updated.  When they passed away, all of the funds in the account went to the ex-spouse and there was nothing that the current spouse could do to challenge the transfer of assets.  Due to the strength of the beneficiary form, there is no way to challenge the form or beneficiary listed.   

This is why we recommend annual beneficiary designation reviews.

You can also list charities as beneficiaries, which is something you may want to do if you’re passionate about certain charities.

It’s very easy to adjust beneficiaries, and you can even do the process online for some accounts. Offline changes require a simple form submission to change beneficiaries.

Tip to Help Beneficiaries

One thing we recommend is that you sit down and make a list of all accounts that you have. Your estate will have a difficult time trying to find all of the accounts you have if you don’t create a list for them.

Additionally, we’ve had some clients find out about accounts well after a person’s death because no one knew they existed.

If you don’t create a list of accounts, you’re putting any of the beneficiaries you use at a significant disadvantage. Also, this same list can be used by you to update and review accounts annually, so it’s a win-win for everyone involved.If you have any questions about beneficiary designations, feel free to schedule a 15-minute complimentary phone call with us.