Notes on naming beneficiaries

Neglecting to name names, forgetting to change names, or naming the wrong names, could potentially create a lot of grief and/or costly mistakes. Please take a moment to consider the following:
Failure to name beneficiaries. Review all accounts and properties to insure a beneficiary is named. Maintain copies of beneficiary designations; individual companies have been known to misplace or lose their internal documentation. If a beneficiary is not named, assets could default to your ‘estate’ which may not reflect your intent, and could subject funds to creditors claims.
Always include a contingent beneficiary. In the event a primary beneficiary predeceases you it is important to have a contingent, or secondary beneficiary, named. If no one is named, it essentially will be treated as though no beneficiary was named; see above.
Confirm that named beneficiaries are in accordance with your overall estate plan. Work with your attorney or other professionals to insure that any named beneficiaries reflect the intent of your overall estate plan. For example, if you have three children who are to receive equal shares of your estate and you have named one of them as the direct beneficiary on your IRA you may have just created an unequal distribution.
Be mindful of potential estate tax issues. There is too much to consider here in one short article. Talk with your tax professional. Redirecting assets (properties, accounts, etc.) to specific beneficiaries may provide tax relief.
Be aware of the “stretch” opportunities with retirement accounts. Again, a lot to consider here and your financial advisor and tax professional should be consulted. The main idea is that your beneficiaries may be able to take withdrawals, and pay taxes, based on their life expectancy – versus taking a full distribution all at once with potentially higher taxes due.
A will does not override a named beneficiary. If a beneficiary is named on an account, and the same account is listed in a will, the named beneficiary on the account will prevail. A common place for this to happen is in the event of divorce when the ex-spouse is never removed as beneficiary from the account. No matter what a will states, these funds will not go to the children or a new spouse; the named beneficiary will prevail.
Use caution in naming your ‘estate’ as the beneficiary. This could potentially result in a need for those assets to go through probate, which is a public and potentially costly and time consuming process. Further, as mentioned earlier, failure to name a beneficiary, or having one predecease you without a contingent, can result in the same consequences.
Naming your spouse as beneficiary. With married couples, spouses are often named as each others beneficiaries. If you are fortunate enough to have a large estate, there are important estate tax considerations to consider; talk with your legal and tax professionals please! Also, many retirement accounts may allow the surviving spouse to assume the account as their own. Many pensions also allow for surviving spousal benefits. Ask questions and be clear on the ramifications when naming beneficiaries.
Naming minor children as beneficiaries. If it is your desire to name minor children as beneficiaries, please get advice on how to do this. For example, if bank and/or investment accounts are left directly to minors it can result in the court being involved to name a guardian and/or a financial institution to oversee the assets. If you have children outside of marriage the surviving parent may have to apply for guardianship over his or her own child. Also, be aware that when the child reaches legal age, as early as age 18 in some states, they can take control of the assets. I know I would not have managed a large inheritance well at that age…
Naming a trust as beneficiary. This is a common choice, and with good reason. If your legal documents are in good order this will assure that your wishes will be met and taxes will be minimized. It can also protect the interests of minor children, special needs children, spendthrift heirs, etc. Talk with your professional advisors!
Naming a charity as beneficiary. Leaving a specified asset directly to a charity that is listed as a named beneficiary is usually pretty straight forward. Beyond that, you will want to make sure your legal documents are in order to avoid confusion and potential tax problems.
Other considerations. How accounts are titled, i.e. jointly, as tenants in common, as transfer or pay on death, result in different treatments in terms of ownership and taxes. Further, community property states have different rules. If you are not sure about account and property titling consult your professional advisors.
Review and update beneficiaries annually or as needed, and please consult your professional legal, tax, and financial advisors!
Kristi Ellington is a registered representative with and securities and advisory services offered through LPL financial, a registered investment advisor. Member FINRA/SIPC.