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Beneficiary Designations… It’s Not That Simple

by Kelly Pedersen, CFP®

We have all likely filled out a beneficiary form at one point in our life. Often a name gets filled in, not realizing that there were very important boxes and titles to also fill out. These sorts of simple mistakes can result in our loved ones not receiving the account intended for them.

Beneficiary “Orders”

  • “Primary” is the first level of beneficiary. You can split it up with multiple people or just one. Often times it is the spouse or the kids.
  • “Contingent” is the second level of beneficiary that can only receive the asset if the primary beneficiaries are no longer alive. For instance, the spouse is often the primary and the kids are contingent. The spouse must be deceased before the kids would get any part of the account.
  • Beneficiaries of a retirement account MUST take withdrawals from the account according to a schedule and they are likely all taxable income. If properly done, the schedule they use is one according to their own age in life (“stretching” the IRA).

Beneficiary of the Beneficiary

  • “Per Stirpes” is a designation you can give any primary or contingent beneficiary. If the primary beneficiary is deceased, then all of their shares would pass equally to their kids. For example, if you have two primary beneficiaries, Jane and Jim, and Jim is deceased, then Jim’s 50% still passes to his children. If Jim has four kids then each of them receives 25% of Jim’s right to 50% of the account. The other 50% goes to Jane.
  • If you named a contingent beneficiary in the example above, they will not get anything because the per stirpes box was checked.
  • This can get a little messy, especially if you have a blended family. Perhaps you wanted your new spouse as primary but your children from the previous marriage to get it after that. If so, then you do NOT want to check per stirpes. Bottom line is, you really want to pay attention to the details.

Beneficiary vs the Will or Trust – Which One Rules?

  • The beneficiary on your IRA, 401(k), retirement account, annuity, life insurance policy, etc. will ALWAYS override whatever is written in the will or revocable trust. It is extremely important to review your beneficiaries periodically for life changes as many mistakes are made here. You can draft the fanciest trust in the world, but the trust may not work if your beneficiary forms and titles aren’t updated.

Leaving the Beneficiary as the “Estate,” Revocable Trust or to a Minor

  • If you leave the beneficiary as any of the above there may be unforeseen consequences. For example, the revocable trust may create a trust for a pool of beneficiaries. If this happens, then the beneficiaries will have to take those required distributions according to, not their own age, but the oldest age of the pool. This can significantly increase the amount a younger person may have had to take if they had their own beneficiary designation instead of a pool.
  • If money is left to a minor, they will need a trustee or guardian of that money until they turn of age. Sometimes when this happens, that guardian will force the inheritance to remain in cash to not take on market risk. This can be detrimental to a portfolio. Or, the required distributions are paid out and the kiddie tax applies – which can be at tax rates of 37%!

Accounts Without a Beneficiary Form – What to Do?

  • Some accounts, like bank checking and investment accounts, don’t have a beneficiary form associated with them. In this case, the title of the account tells you what to do with it at death (and yes, it supersedes a will). If the account title is joint, then the surviving joint owner gets it. If it’s titled in the name of a revocable trust, then the trust is the beneficiary. If the account is individual, then it becomes a “probate asset” and the court will decide how it is to be distributed (usually by looking at the will first for any direction).
  • If you want to avoid the time and cost of probate, then you can add a version of a beneficiary called “Payable on Death” (POD) or “Transferable on Death” (TOD). If you add this, then the account will automatically go to the person you name instead of having to ask a judge to name the right person. Still, the title of the account supersedes the TOD/POD. For example, a joint account first goes to the surviving joint owner but at the surviving owner’s death, it will go to the TOD/POD.

Phew… it’s complicated. Which is why you should work with your financial advisor and estate attorney to ensure your paperwork aligns with your wishes.

Caissa Wealth Strategies is a fee based registered investment advisory firm, specializing in personal, dynamic wealth management. Based in Bloomington, Minnesota, Caissa financial planning professionals provide individualized strategies for every client. You can expect more from CAISSA, and in turn, you will get a fiercely loyal advocate on your side. For more news and information on wealth management solutions, visit Caissa Wealth.