Ep. 175 – Beneficiary Designations – What You Need to Know

Have you been wondering whether to do a beneficiary and how to do it? There are different accounts that require you to have beneficiaries, including your retirement accounts.

A beneficiary is a person you assign while you’re living to receive the benefits of your accounts after you pass.

In this episode of the Secure Your Retirement podcast, we talk about beneficiary destinations and how to do them correctly. Listen in to learn the importance of doing annual beneficiary reviews and listing your accounts for the benefit of your beneficiaries.  

In this episode, find out:

• Different types of accounts that are almost required to have beneficiaries.
• Understanding the primary and contingent beneficiaries plus the tax risks of not having a beneficiary.
• The differences between the per capita and per stirpes beneficiary destinations.
• How the per stirpes language can help with the tax options during inheritance.
• Have beneficiaries in place for all accounts, and ensure you do a beneficiary review every year.
• The importance of listing all of your accounts to ensure your beneficiaries know where to look.

Tweetable Quotes:

• “The beauty of per stirpes is that it makes sure that the lineage is taken care of versus one person getting everything because someone is not around to inherit.”– Murs Tariq
• “Make a list of all of your accounts so that whoever your beneficiaries are, they’ll know where to go look.”– Radon Stancil 

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the Full Transcript:

Radon:	Welcome, everyone, to our Secure Your Retirement podcast. We are certainly happy to have you with us to talk about a topic that we deal with all the time, and that is beneficiaries, beneficiary designations. How do I do it? Is there a reason to not do it? Is there a reason as to how to do it? We’ve got a lot of different topics that we’re going to discuss or subtopics around this idea of beneficiaries.
	But, first of all, I just wanted to talk about this for a second and I’ll let Murs speak on it, what types of accounts would you say, Murs, that people say absolutely, it’s almost a requirement to have a beneficiary?
Murs:	Yeah. Almost required is going to be your 401(k)s, your IRA accounts so your retirement-type accounts, 401(k)s, 403(b)s, 457s, IRAs, Roth accounts, and also life insurance. It’s almost by default that you’re going to be entering in a beneficiary to those.
	Just a quick point on what a beneficiary is, it’s going to be who you assign while you are living to receive the benefits of what is in that account after you pass. You can break it into a primary and a contingent beneficiary, and we can talk about that, too. But basically, your retirement accounts are going to be the ones that are the most common that everyone hears about, make sure you have your beneficiaries in place with those accounts.
	But also there’s a plethora of other types of accounts out there that you really want to have beneficiaries. In our eyes, you want to have beneficiaries on every single account that allows beneficiaries, but the most common are going to be your retirement accounts.
Radon:	Yeah. Those other accounts that Murs is talking about would be your brokerage account, your bank account, all of those you can add beneficiaries to. Sometimes it might be called something different, like transfer-on-death. But when you do that, it just avoids them having to go through any kind of probate with those accounts. It just goes directly to the beneficiary.
	You mentioned a term there, Murs, a couple terms and I want to make sure people understand it, a primary and contingent. What does that mean? Well, on all the accounts, basically, that you’re going to want to name a primary beneficiary so let’s just walk through an example. Let’s say that you are married and so you want to name your spouse as the primary beneficiary. Well, why would you want to name anybody below the spouse? That would be called a contingent beneficiary.
	Well, there are instances that could occur where either you forget or some tragic event occurred where you and your spouse both passed at the same time. A car wreck could be an example of that. If you don’t have somebody named it then goes to your estate and you don’t want that. We’ll talk about that a little bit more as to why. So if the spouse is not there, then the funds will go to the contingent beneficiaries.
	Now you can name as many beneficiaries as you want. You just need to put a percentage as to what you want them to get. Let’s pretend that your contingents, you had 10 beneficiaries and you want them all to get equal. Then you can just say 10% per beneficiary and they’ll all get their 10% of whatever the balance is.
	If you do not have a contingent named as the beneficiary and it goes to your estate, then your estate, if it’s an IRA or a 401(k), is going to have to pay all the taxes right then, lump sum. And that’s going to be a higher tax rate than if the beneficiary were to inherit that money and be able to do that in a different format.
	But now let’s talk a little bit about, though, how we can do some titling so that the money can move in the way we want and I’m going to have Murs talk about two designations that you could put behind the beneficiary’s name and, by doing that, it will make a difference as how the money is distributed.
Murs:	Yeah. The two main designations that you can attach to your beneficiaries are what’s called per capita and per stirpes. I’ll spell it out for you and Radon will tell you that we’ve got a blog as well that’s going to have this listed out, but a lot of times people just don’t know that word, stirpes, but it’s… So per capita is P-E-R C-A-P-I-T-A and then per stirpes is P-E-R S-T-I-R-P-E-S.
	The big difference between those two, if you go with the per capita mindset and that’s kind of the default on beneficiaries, and it’s what you think of. Let’s say you have two beneficiaries to make it very simple. You have two primary beneficiaries and you have them split up as 50% to one, 50% to person number two. In the event that person number one is not around when you have passed, well, the per capita says now person number two, primary beneficiary number two, is going to get a hundred percent of what the account is.
	So originally it was going to go 50-50, but that one beneficiary is no longer there to receive the funds so all of the money, 100% their share is going to go over into person number two. So it’s kind of just moving it across the levels of who you have listed as primary.
	Same deal if you have four beneficiaries and one is not there, then the three remaining beneficiaries will get the one person’s share and they’ll be split evenly. That’s per capita. Just think about it as being split even, or split amongst the line of who you have listed as primary beneficiaries.
	Per stirpes is something that can be very powerful and very useful, but you really need to understand it. Per stirpes is, instead of going across the line, it’s actually going down that person’s lineage.
	Take the event, again, you’ve got two primary beneficiaries listed, and now you have them listed as per stirpes and not as per capita. Let’s say person A is no longer around to receive the funds when you pass. Instead of it going to the primary beneficiary like in the per capita example, it’ll actually go down that person’s lineage to the next heir. So that could be that person’s son or daughter, or if they have multiple kids, it could go down to all of the kids split evenly. Let’s say that primary beneficiary has passed and they had two kids that survived them. Well, if you’re using per stirpes, it’ll automatically go down to those two kids and they will get a 50-50 split of what that primary was supposed to get.
	The beauty of per stirpes is that it allows you to kind of cover all the bases in a way of making sure that the lineage is taken care of versus one person getting everything because someone is not around to inherit. So the big way to remember it is per capita is going to go across as far as who is listed and per stirpes is going to go down the lineage as far as who is listed, if someone is not there to inherit the funds.
Radon:	Yeah. I think the other thing that I appreciate and like about that per stirpes because sometimes when we’re talking with somebody, they say, “Well, yeah, but what if I have another grandchild that is born?” Well, if I’ve got per stirpes there, I don’t have to worry about naming them. When they’re born, they automatically become a part of that beneficiary designation.
	Let’s just say you name your son as the contingent beneficiary, so you have your spouse as the primary, your son, or daughter or children as contingents, and you put per stirpes behind their name, then you don’t have to ever worry about the grandchildren. They’re automatically there because that lineage, like Murs said, is going.
	Now, let me just tell you why I think it’s so important that you have a contingent and even the per stirpes language for grandchildren and I’d like to walk you through this scenario.
	Let’s say that I pass away and I leave a sizable amount of money that’s particularly, in this case, in an IRA or 401(k). I also am leaving some money that’s non-401(k) IRA money. It goes to my son or daughter and let’s say that they are very good income earners. Well, if they take it out in their tax bracket, they’re going to pay a very high tax rate because they’re already making very good money.
	Well, what they could do if we’ve named the per stirpes so that the grandchildren are there, and this does not work if they’re not even having that per stirpes language or them listed, but then that person could basically disclaim their inheritance, any percentage of it, and have it go down to your grandchildren.
	Why would they do that? Well, if the grandchildren are at a lower tax bracket, then they can pull those funds out of the IRA or 401(k) that they inherited at a much lower tax rate than if the son or daughter did it.
	Sometimes people don’t know that and so what’ll happen is the son or daughter will take the money out, they’ll pay their tax rate and then they’ll go give the money to their children. That just doesn’t make sense when it comes to a tax planning. So you want that language there so that we have tax options.
	By the way, this can be done at the time. This is not something that’s got to be planned ahead of time as to whether or not you’re going to disclaim or not. But the beneficiaries have to be listed. If you have any questions about that, we’re glad to assist you in that way, if at all possible, in order to help you when it comes to that.
	One little caveat, I’m going to say and Murs and I believe in doing beneficiary reviews every single year. Why? Why do we do a beneficiary review every single year? Because we forget. We forget sometimes how we had our beneficiaries.
	I’ll tell you a quick story that is a true story, but a person got a divorce. They didn’t go through beneficiaries review on all their accounts. They thought they had updated all of their accounts and life insurance to their new spouse, but they had missed an account and the ex-spouse is the one who received those funds.
	Now there is no way, there’s nothing in the law that says, “Wait a minute, it should be assumed that it’s the new spouse.” Absolutely not. If you name that beneficiary there, they will get it. They will get it. There’s no argument about it. There’s no court system that’s going to change it because the beneficiary form is a very powerful form.
	Another thing just to keep in mind is that you can name charities as beneficiaries. Let’s say that you say, “Hey, if my spouse is not here, then I want it to go to a charity or at least some part of it.” I could name a charity as a beneficiary.
	So there’s lots of different tools that I have within the realm of a beneficiary designation so we just want to make sure that we go through it. We have a checklist to make sure that we’ve made sure that everything is in place and we haven’t forgotten anything.
	Anything else, Murs, as far as that goes?
Murs:	No. I mean, I think the bottom line here is a couple things. One is make sure you have beneficiaries in place for all accounts possible, so more than just your retirement accounts and life insurance, and always be making annual reviews to those because life changes, things happen and beneficiaries come into the mix and they go out of the mix. So let’s make sure we’re staying up-to-date on those.
	By the way, it’s very easy to make changes to your beneficiaries as well. A lot of the platforms today are allowing you to do it online so it’s as simple as logging into your IRA account and making the change online.
	Otherwise, it’s a simple form that you can get from the custodian that holds the funds so the process is very easy.
	What happens in life is that we just procrastinate and we neglect, and then we forget about it. And the next thing we know, we’ve got an estate planning issue and we don’t like seeing those. So the beneficiary is a very, very powerful thing.
	The deal is that you worked hard, you saved money and you want to make sure it goes to the people that you want after you’re not there to give it to them.
Radon:	Yes. If you really want to just go all out and be the best at this whole scenario, one little added feature that you can do that we think is really, really powerful is basically make a list of all of your accounts as to where they are. So if you’ve got some at Charles Schwab, some at TD Ameritrade, some life insurance policy, make a list of all those so that whoever the beneficiaries are, they’ll know where to go look. Because if you don’t have them listed, they’re not going to know maybe about some of those accounts.
	We’ve heard of cases many times where somebody didn’t realize there was a life insurance policy or they forgot there was an IRA somewhere. And it might not have been a major one, but a few thousand dollars is a few thousand dollars and we want to make sure that they know exactly where it’s at. So we encourage have all of those listed because that can be a very powerful tool to a beneficiary trying to figure out where all the accounts are.
	We hope this has been beneficial. Like Murs said earlier, we will have a blog on our blog page written on this topic of beneficiaries. Just go to our website, which is pomwealth.net. Go to the blog page.
	If you have questions and you think, “Man, I’d love to understand this a little bit better,” then go to the top right-hand corner, click on the button that says Schedule a Call. You’ll see our calendar come up. You can schedule a 15-minute, no-obligation complimentary phone call. We’re glad to walk you through this. Maybe walk you through some of these checklists as far as what you want to consider when it comes to beneficiaries.
	We hope you have a great week. We’ll talk to you again next Monday.