DO - Know Accounts That Have Beneficiary Designations
IRA, 401(k), 403(b) and 457 plans, SEP and Simple IRAs, Pension Plans, Employee Stock Ownership Plans (ESOPs), Life Insurance, Annuities, Employee Benefit Plans, Transfer-on-death (TOD) account
DON'T- Forget To Name Beneficiaries
Assets that pass by beneficiary designations are not subject to probate. But if you fail to name a beneficiary for that asset, it becomes part of your probate estate. This could delay distribution or lead to additional administrative costs.
DO - Name Both Primary And Contingent Beneficiaries
It is important to name a "back up" beneficiary in case the primary beneficiary predeceases you. Again, this is important because it will avoid having a non-probate asset ending up in probate.
DO- Review And Update Beneficiary Designations For Life Events
Review your beneficiary designations regularly and update them as need, based on a birth, death, marriage or divorce. Failure to update designations can result in a transfer of assets to unintended beneficiaries - like an ex-spouse or heirs of a deceased beneficiary.
DO - Coordinate With Your Will And Trust
Whenever you change your will or trust, be sure to talk with your attorney about your beneficiary designations. Be certain that you understand how all the different parts of your estate plan work as a whole.
DO - Understand Potential Consequences of Naming Individual Beneficiaries For A Particular Asset
Consider the example of someone who established three equal accounts and named a different child as beneficiary of each. Over the years, some accounts grew more than others, so some beneficiaries got more and others less - which may not be what was originally intended.
DON'T - Name Your Estate As Beneficiary
This causes nonprobate assets to become subject to probate. And for IRAs and qualified retirement plans, there may be unfavorable income-tax consequences. The required minimum distribution (RMD) rules generally let an individual beneficiary "stretch" distributions over his or her life expectancy. And so, in most cases, taxable distributions must be made over a shorter time frame than would apply if an individual had been named as beneficiary.
DO- Use Caution When Naming A Trust As Beneficiary
Consult your attorney or CPA before naming a trust as beneficiary for IRAs, qualified retirement plans or annuities. In many cases, the governing document (the plan document or annuity contract) or tax law (the RMD rules) may require accelerated taxable distributions when a trust is beneficiary. There are situations where it makes sense to name a trust.
DO - Explore Rollover Alternative When Changing Jobs
Nonspousal beneficiaries of qualified retirement plans, such as a 401(k) or profit-sharing plan, must be allowed to make a direct rollover into an inherited IRA for any amounts eligible to roll over. However, if he or she doesn't transfer the assets in a timely manner (by the end of the year following the year of death), his or her distribution options will be limited to those allowed in the qualified plan. As a result, the beneficiary may not be permitted to "stretch out: distribution over his or her life expectancy, which he or she may be able to do with an inherited IRA.
DO - Consider Naming A Charitable Organization As Beneficiary
The beneficiary of an IRA, qualified retirement plan or deferred annuity will need to pay income taxes on all or part of the distributions from these accounts. But if a qualified charity is named as beneficiary, it can take distributions without any income tax. If your estate plan includes a bequest to charity, talk to your tax advisor about naming a charity as beneficiary of income-taxable assets.
DO - Use Disclaimers When Necessary - But Be Careful
Mistakes involving beneficiary designations are often not discovered until after an account owner's death. In some cases, it is possible to "fix" mistakes by using a disclaimer - a legal document that lets the named beneficiary refuse the asset. When a beneficiary disclaims an asset, it passes to whomever is next in line. Disclaimers involve complex legal and tax issues and require careful consultation with your attorney and CPA.
Additional resources provided by the author
Beneficiary designations can have a big effect on whether your estate plan works as intended. Gathering all of your beneficiary designations will have you be better prepared when you meet with your attorney and CPA to review your estate plan.