Understanding Beneficiary Designations

As a seasoned financial advisor, I often find that one of the most overlooked yet critical aspects of financial planning is understanding beneficiary designations. Many people assume that once they’ve set up their accounts and investments, their job is done. However, the choices you make regarding beneficiaries can have profound implications for your loved ones after you’re gone. Here’s what you need to know to make informed decisions and avoid common pitfalls.

What Are Beneficiary Designations?

Beneficiary designations are instructions you provide to financial institutions regarding who should receive your assets — such as retirement accounts, life insurance policies, and certain bank accounts — upon your death. These designations override any instructions in your will or trust, so they are essential to ensuring your assets are distributed according to your wishes.

Common Types of Beneficiary Designations

There are several common types of beneficiary designations you may encounter:

• Primary Beneficiaries: These are the people and/or entities who will receive the assets upon your death.
• Contingent Beneficiary: If your primary beneficiaries predecease you or are unable to inherit, the contingent beneficiaries receive the assets.
• Per Stirpes vs. Per Capita: Per stirpes means that if a primary beneficiary (like a child) predeceases you, their share will pass to their descendants (your grandchildren). Per capita means the assets are divided equally among living beneficiaries in the same generation level. The application of these terms may differ between states and custodians, so be sure to read the fine print.

Key Considerations When Naming Beneficiaries

When choosing beneficiaries, it’s crucial to consider several factors:

• Accuracy and Detail: Ensure beneficiary information is accurate and up-to-date. Include full names, dates of birth, and Social Security numbers to avoid confusion or delays. Periodically confirm the financial institution still has your beneficiary designation accurately on file.
• Tax Implications: Different types of assets may receive different tax treatment when distributed to beneficiaries. For example, disbursements from an IRA will generally be taxed at ordinary income tax rates, and depending on who is inheriting the account, there will be different rules regarding when and how much the beneficiary must draw from the account.
• Life Changes: Regularly review and update your beneficiaries after major life events such as marriage, divorce, births, or deaths in the family.

Common Mistakes to Avoid

Despite their importance, beneficiary designations are often mishandled. Here are some common mistakes you should be aware of:

1. Not Naming a Beneficiary: Failing to designate a beneficiary or leaving the designation blank can lead to assets being distributed according to state law, which may not align with your wishes. This can often occur when starting a new job or transferring accounts.
2. Outdated Information: Forgetting to update beneficiary designations after major life changes can result in assets going to unintended recipients (e.g., ex-spouses).
3. Incorrect Designations: Misunderstanding the implications of different types of designations (e.g., per stirpes vs. per capita) can lead to unintended distribution of assets.
4. Ignoring Tax Consequences: Certain beneficiary designations can have significant tax implications. Consulting with a financial advisor or tax professional can help ensure your assets are divided efficiently and in a way to best achieve your goals.
5. Be Careful with Your Trust: If you have a revocable living trust, be sure to consult your attorney before naming the trust as a beneficiary on a retirement account, as recent rule changes have made this less favorable.

Conclusion

Understanding beneficiary designations is essential for ensuring your affairs are in order. By taking the time to carefully consider your choices and regularly review them, you can avoid common mistakes and ensure you leave the proper legacy to your heirs. Remember, proactive planning today can make all the difference for tomorrow.

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.