The importance of beneficiary designations
December 15, 2021

Too often, people believe their wills will solely determine who receives their assets. While this is true for “probate assets,” which are assets that are usually owned solely in a person’s name, it is not the case for multiple non-probate assets, which are assets that have a designated beneficiary.

If you have qualified retirement plans, traditional and ROTH IRAs, tax-deferred annuities or life insurance policies, those funds will be distributed after your death to individuals you have specifically designated as your beneficiaries, unless you specifically designate your estate as beneficiary. If you want to ensure a specific person receives the funds, you must designate a beneficiary. It is good practice to name a contingent beneficiary, in the event your initial beneficiary precedes you in death. Failure to do so may result in your non-probate assets being moved to your estate where they could be taxed.

Trusts are another way to direct non-probate assets to your beneficiaries. A trust, can protect your beneficiary’s assets from legal challenges, creditors, divorce matters and potentially poor financial decisions.

If you believe a trust best suits your needs, consulting with a trust attorney and a professional tax advisor is highly recommended. Designating a trust as the beneficiary for a retirement plan or IRA of any type can be complex and recent changes to the SECURE Act have shortened the payout periods for those accounts.

Under the SECURE Act legislation, assets belonging to retirement account owners who die after Dec. 31, 2019 must be distributed to beneficiaries within 10 years of their death, unless the designated beneficiary is an “eligible, designated beneficiary.” This applies to both Roth IRA and Roth 401(k) accounts.

An “eligible designated beneficiary” includes a surviving spouse, chronically ill or disabled beneficiaries, minor children of the account owner (up to the age of majority, or age 26, if the child is in school), providing the beneficiaries are not more than 10 years younger than the original account owner.

Most tax advisors believe the new rule means annual distributions are not required, and the beneficiary can choose to leave the money in the account to grow, tax-deferred, for the full decade.

However, that being said, the IRS is still sorting out issues surrounding the rule and advisors are recommending not taking unnecessary distributions until the Internal Revenue Service settles the matter, presumably by the end of this year.

As one can see, naming beneficiaries and understanding the many critical implications of that decision is a vital part of estate planning. We advise you to check the beneficiary status of your non probate assets each year, or when a major life events, such as marriage, divorce, births or deaths occur.

Our tax experts are here to help guide you through these important decisions. Please contact us with any questions or concerns.


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