The decision about how to designate beneficiaries for your company retirement plan, life insurance policies, and other assets might seem really simple.  Chances are you would like those near and dear to you to inherit any money you’ve accumulated during your lifetime, so making sure that happens should be as simple as writing their names on the appropriate forms, right?

Not so fast.  Naming beneficiaries is a more nuanced decision-making process than you might think, and it’s one that may have significant repercussions for your loved ones.


    You can typically name beneficiaries for a broad range of assets, including retirement plans, annuities, and life insurance policies.  And you can name almost anyone – or anything – as your beneficiary, including individuals, charities and trusts.  Children under the age of majority – age 18 – should not be named as beneficiaries of life insurance policies, retirement plans, or annuities, however.

    When you name a beneficiary, those assets can pass directly to whomever you designate; they won’t have to go through probate, which can be a lengthy and costly process.  In addition, bear in mind that your beneficiary designations will override bequests you’ve made in your will.

    For example, even though your will might state that you want your spouse to inherit all of your assets, your mother will get a piece of the pie if you named her as the beneficiary of your company retirement plan and didn’t bother to change it after you got married.

    Plan to review your beneficiary designations on a regular schedule, ideally as part of an annual review of your finances.  Major life events, such as a marriage, a divorce, the birth of a child, or the death of a loved one may require that you make changes to your designations.  Similarly, you’ll also want to review your beneficiary designations if you or your employer has recently switched retirement plans or insurance providers, as the beneficiaries you specified with your previous provider may not automatically carry on to the new one.

    Before you make your beneficiary designations, be aware that inheriting assets can have tax ramification for your loved ones. (That’s not the case if you name a charity as your beneficiary, however.  Not only will the charity receive the assets tax-free, but your estate will also be eligible for a charitable deduction.) 
    If you make someone other than your spouse the beneficiary of your company retirement plan assets he or she may have to take mandatory distribution for that plan and in turn pay taxes on the money.  Your spouse on the other hand will be able to roll over your retirement plan assets into his or her own IRA and won’t have to pay taxes until distributions begin.

    If you have a particularly trusted friend or relative, it may be tempting to name him or her as your beneficiary with the assumption that that person would “know” how to distribute your assets in accordance with your wishes.  For example, you might want to name your financially savvy brother as your beneficiary of your retirement plan; he, in turn could distribute your assets to each of your siblings.

    I’d advise against this approach, however.  For one thing, there’s the possibility that your savvy brother won’t know precisely how you’d want those assets distributed or could decide to keep it all for himself.  Perhaps more importantly, you could create or compound estate planning issues for that person.  Even if that individual ends up distributing the inherited assets to others those assets will still be considered part of that person’s estate when he or she passes away.

    For all these reasons, it pays to be as specific as possible when designating beneficiaries.  Most beneficiary destinations forms allow you to name multiple primary and contingent beneficiaries and to specify what percentage of assets you’d like distributed to each person upon your death.

    If you make a minor a beneficiary of your 401(k), life insurance policy, IRA or bank account the money will be paid to a sequestered bank account.  The minor’s legal guardian will have no access.  Upon attaining age 18 the child well get all of the money at once.

    Best practice is to have a trust for minors in your will named as the beneficiary.

    We all want to make sure that any physically or mentally disabled loved ones are well provided for.  Remember however that you could affect the disabled individual’s eligibility for government provided benefits by transferring assets directly to him or her.  In addition if the person is mentally disabled, he or she may not be able to manage the assets.

    If you’re in a position to transfer assets to a loved one with special needs it may be recommended that you set up a Special needs Trust or ABLE account.
Categories: Wills and Estates