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The Truth About Beneficiaries

It couldn’t be simpler: beneficiaries you name in financial accounts like IRAs, retirement plans and insurance policies inherit the proceeds directly instead of waiting for a will to go through probate. The trick is keeping on top of all the accounts.

Track Down Your Accounts

People move around a lot more these days. Make sure that retirement or other investment accounts go with you; update the beneficiaries at the same time.

  1. Your financial adviser can help you roll over 401(k)s, 403(b)s or other retirement and pension plans when you switch jobs.
  2. Check the status of life insurance and disability plans that you acquired back in the day, either at the office or individually.
  3. Whatever happened to the trading accounts you opened back in the dot.com era? A little housekeeping may be in order.

One by One

Your will has no effect on individual accounts with named beneficiaries despite changes in your personal life. To prevent surprises for your heirs:

  1. Check each IRA, retirement and insurance policy to see that the beneficiary is current.
  2. A periodic review of all your accounts is a good idea; extra scrutiny after a major event such as divorce or a death in the family makes sense, too.
  3. Never leave the beneficiary form blank. In that case the account will have to go through probate with the courts deciding who inherits the proceeds.  Updating the forms is easy if you change your mind.
  4. Name contingency beneficiaries in case your primary beneficiary predeceases you.
    1. You always have the option of dividing the account among several primary or contingency beneficiaries.
    2. The primary beneficiary has the option of issuing a disclaiming of the assets, which would permit the disclaimed assets to  pass to the contingent beneficiary/ies without incurring gift taxes — if the disclaimer is done correctly.
  5. A favorite charity can also be named as a beneficiary. Find out the organization’s Tax ID number to put on the form.

Modern Families

Consult your financial team to review the fine points so that you can make the wisest choice for your loved ones. Keep in mind:

  1. Your spouse can postpone distributions by rolling over your retirement account(s).  Not so for your kids, who cannot wait more than a year before drawing on the funds. And that means paying taxes, too.
  2. The courts will get involved when the beneficiary is below age18. Consider leaving assets to minors in a trust instead. Consult your estate attorney to ensure the trust is properly structured to prevent the assets to be taken out over a five year period.
    1. A trust could also be the way to go for beneficiaries involving stepchildren or complicated family situations.
    2. In the case of a family business with varying responsibilities among the heirs, it may help to spell things out in a trust.
  3. Listing your estate as a beneficiary will force your heirs to take out all the proceeds within five years. Beside tax consequences, it could force heirs to liquidate investments in an untimely manner.

If your assets are complex — and even if they’re not — your beneficiaries will thank you for settling the details. Follow up on your accounts on a regular basis so that their distribution is always the way you want it.

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Gerstein Fisher
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