The Importance of Beneficiary Designations

THV11’s recent post, “The importance of beneficiary designations”, explains that designating beneficiaries is a very important part of the proper handling of many documents—like life insurance, retirement accounts, bank accounts, and investment accounts. Each of these may ask you to designate a beneficiary in the event that something happens to you. A beneficiary designation is your legal direction to the account administrator regarding who should get the money in your account if you were to die prior to using the money yourself.

Many name a spouse or a child as a beneficiary but don’t realize that there can be legal issues to consider when making this selection. Also, it’s important to keep these choices up-to-date with changing circumstances.

As an illustration, some folks who have owned life insurance policies for a very long time haven’t looked at their policies in many years. When they review the policies, items of concern often pop up—like an ex-spouse or a dead relative still named as a beneficiary.

Retirement accounts—like IRA accounts, 401(k)s, and 403(b)s—require up-to-date beneficiary designations to be on file with the plan sponsor. With retirement accounts, typically the best primary beneficiary will be your spouse and the secondary beneficiaries will be your children.

However, if you have a trust created as a part of your estate planning strategy, the trust may be a beneficiary of last resort. That’s because there’s a difference in tax treatment of living persons vs. trusts.

Also, a living person is generally the right designation for a beneficiary of a retirement account, but a qualified charity could be a beneficiary of a retirement account. Speak with your estate planning attorney for help naming beneficiaries.

Reference: THV11 (July 5, 2016) “The importance of beneficiary designations”

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