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Review Your Beneficiary Designation Forms

Posted by Marty Williams, CPA on May 13, 2016 8:51:43 AM

iStock_000048005528_Large-299835-edited.jpgWhat to Look For

When was the last time you checked the beneficiaries you selected for your qualified retirement plan or IRA? Chances are that the choices you made when you initiated the account may no longer be appropriate. Anyone with funds in one or both of these accounts should have at least one beneficiary listed should anything happen to the owner.

Review your beneficiary designation forms and look for these common mistakes:

  1. No named beneficiaries
  2. Naming your will or estate as your beneficiary
  3. Minor beneficiaries
  4. College age beneficiaries
  5. Ex-spouse as a beneficiary
  6. No contingent beneficiary
  7. Special needs individual as a beneficiary
  8. Not naming a trust as IRA beneficiary for asset protection
  9. Naming a generic trust as beneficiary
  10. Elderly parents as beneficiary

Failure to make specific elections on benefit forms can make it difficult for your beneficiaries to gain access to funds. It can also cause them to incur a tax liability that you never intended. Beneficiary designations override your will, so they need to be carefully coordinated with your overall estate plan.

The Opportunity

First, you should periodically review your beneficiary designations, especially when there is a change in marital status, births, and 401(k) or IRA rollovers. Keep in mind that beneficiary designations on retirement plans don't carry over when you roll a retirement plan to a new employer's plan or convert a regular IRA to a Roth IRA. Review the forms for all of your benefits carefully. Make sure your beneficiaries are listed with complete information. 

Next, pay attention to the other elections on your forms. You can determine how you want your beneficiaries to receive payments and help lessen their taxable burden. For example, with your investments accounts, you may choose that your beneficiaries receive installments for a fixed period of time as opposed to a lump sum, which incurs heavy, immediate taxation. You might want to elect “life income,” which means that beneficiaries receive payments over the course of their lives. A “stretch” IRA, can be a powerful wealth generator and allows you to stretch your IRA over several future generations.

The Benefit

Take into account the size of your retirement savings and imagine how your beneficiaries will handle the important implications of inheriting this money, including taxation. Many of us would likely feel unsettled knowing that our lifetime savings could be cashed out and spent so quickly. Fortunately, you can have input on how your funds work by making specific elections on your beneficiary forms.

To begin, be sure to communicate your wishes to your beneficiaries. Let them know your wish to see them use that inherited account in their lifetimes or to use the proceeds in some other way.

Finally, you might want to consider naming a trust as beneficiary. Rather than being paid to an individual, distributions will be paid into a trust with your specific written instructions about who will receive this money and when. By doing so, you will have more control over your tax-deferred money. For example, your trust could provide income to your surviving spouse for as long as he or she lives. You could even be as specific as providing periodic income to grandchildren while keeping the balance safe from any irresponsible members of the immediate family or their spouses.

Looking for more information on the above article or individual tax planning contact Marty Williams, CPA by calling (334) 887-7022 or by leaving us a message below.

Topics: Individual Tax Planning

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