The Importance of a Named Beneficiary

Nicole Treadwell |

Many people do not realize the importance of having a beneficiary listed on their retirement account or investment account. It is extremely important to review your current account beneficiaries and make sure they are consistent with your current estate plans. Whether or not you have a named beneficiary can affect how your assets are distributed and taxed.

For retirement accounts, which is any type of IRA or work sponsored retirement plan, having a named beneficiary can improve the way the account is taxed. If at your death you have a named beneficiary on your retirement account, the beneficiary will have a few options on when to distribute the account.  When a non-spousal beneficiaries inherits an account they have the option distribute the entire account at once and immediately pay the income tax, or distribute and pay income taxes over 5 years, or set up an inherited IRA and take distributions on the decedent’s life expectancy to extend tax deferral. Spousal beneficiaries have the additional option of transferring the funds into their own IRA and further deferring the taxable distributions. If at your death you do not have a named beneficiary on your retirement account, the account passes into your estate and the entire account has to be distributed and taxed within five years.

For a taxable investment account, you can also name a beneficiary. This requires setting up the account as a transfer on death account. At your passing, your beneficiary will be able to receive the account directly, rather than having it first pass through your estate and then to a beneficiary. This may cut down on the overall expense and time of managing your estate.

Here are some additional considerations when reviewing your beneficiaries:

A named beneficiary takes the account out of probate which cuts down on expenses for the estate and reduces the time it would take for the beneficiary to have control of the account.

Beneficiary designations for each account control over an individual’s estate planning documents such as a will.

A prenuptial or premarital agreement will have no legal impact on ERISA controlled (ex. 401k, 403b or Profit Sharing Plans) beneficiary designations or spousal rights.

In many states a minor child (under 18) named as beneficiary may not be considered legally competent to manage their own account. The state may name a conservator, custodian or guardian to accept payment on behalf of the minor child at your death. Another option would be name your chosen trustee or custodian to accept payment on behalf of the minor.

There can be many complex issues surrounding beneficiary designations. If you have any questions regarding your current beneficiary designations, please give us a call at 919-876-4926.