The Importance of Beneficiary Designations

"Carol Page" got a call from the bank—an IRA from her deceased father was found and paperwork needed to be signed. But before the money was made available, a snag was discovered—her mother was named as the beneficiary, and unfortunately, her mother had recently died.

The bank explained that now Page had to work with the probate court regarding the estate and needed to get a tax ID number for it as well. Ugh!

Retirement account designations are separate, generally speaking. They're not governed by provisions in your will or trust unless you name the trust the beneficiary. Usually, in the eyes of the account custodian—the brokerage or bank that's maintaining the account—and generally the law as well, the designation on the IRA trumps any other directive.

Update your beneficiary designation after you experience a change in family status and review it periodically so it doesn't become outdated or incorrect.

Clarity is paramount if you want your wishes to be fulfilled. Beneficiary designations generally become active immediately after death and override any information regarding inherited assets provided in your will. These assets won't have to go through probate—a legal proceeding that can be time-consuming and possibly very expensive.

Also, if the inheriting spouse, for example, reaches the target age after the beginning of the year, the normal retirement account required minimum distribution rules apply. Check with your tax adviser for details because mandatory distribution rules are complex.

Heirs other than spouses may face some tax consequences. They must transfer the assets into an inherited IRA and withdraw all assets within ten years of the original account holder's death. Exceptions can be made if the heir is a minor, disabled, or chronically ill.

Beneficiary paperwork and designations are typically made when the account is opened, and many people may not remember whom they assigned as beneficiary or whether they assigned one at all. Ensure that your current beneficiary designations reflect your most recent wishes, because you cannot override them.

Review your designated beneficiaries every year on all your retirement and life insurance accounts, and update the information after any major life change, such as marriage, divorce, or the birth of a child. 

Take time to review your selections to make sure your wishes are up to date and to help your loved ones avoid future headaches. Check with your estate planning attorney for more details and to make the right choices.

Join our newsletter for insights and information that matter to you or your business

About this Author