The power of beneficiary designations and how an account is titled is often overlooked. The simplest way to ensure your assets are transferred properly and efficiently is by reviewing your beneficiary settings regularly and coordinating your assets with your overarching estate plan.

Want to learn more about the ins and outs of beneficiary designations? Check out our latest blog post below.

We have all likely filled out a beneficiary form at one point. The task seems straightforward, but outcomes often hang in the balance of specific details that are easy to overlook. Given beneficiary designations’ impact, it is essential to understand the considerations that accompany updating yours. Here are some following things to consider:

Beneficiary “Orders”

• “Primary” is the first category of beneficiary. In your chosen percentages, you can designate a primary beneficiary as one person or across multiple parties. Oftentimes, it is a spouse or the kids.
• “Contingent” is the second beneficiary category and will receive the asset only if the primary beneficiaries are no longer alive. For instance, the spouse is often the primary and the kids contingent. The spouse must be decreased before the kids inherit any part of the account.
• Beneficiaries of a qualified retirement account must withdraw from the account according to a specified schedule mandated by the IRS. These withdrawals are generally considered taxable income. Regularly evolving legislation around these mandated distributions can translate into complexity – it is best to work with a financial advisor to ensure distributions are being handled appropriately.

Beneficiary of the Beneficiary

• “Per Stirpes,” meaning “by the branch,” is a designation that can be applied to any primary or contingent beneficiary designation. Under this election, a deceased primary beneficiary’s share would pass equally to their descendants. For example, if you have two primary beneficiaries named Jane and Jim, and Jim is deceased, then Jim’s 50% passes to his children. Assuming Jim has four kids, then each of those children receives 25% of Jim’s 50% share. The other original 50% goes to Jane.
• If you had named a contingent beneficiary in the example above, they would not inherit anything because the per stirpes box was checked. If the box had not been checked, Jim’s children would have been bypassed altogether, and his share transferred to the contingent beneficiary named.
• This can get complex, especially in blended family situations. Perhaps you wanted your new spouse to be named primary, but your children from the previous marriage would inherit the funds if your new spouse had already passed. If so, you do not want to check per stirpes when naming your wife.

Beneficiary vs. the Will or Trust – Which One Rules?

• The beneficiary on an IRA, 401(k), retirement account, annuity, life insurance policy, etc., will always override what is written in a will or revocable trust. Reviewing beneficiaries periodically for life changes is extremely important, as many mistakes are made here. Even the most elaborately and meticulously written trust may not ultimately be implemented if beneficiary titles aren’t updated properly.
• Too often, an estate plan review only assesses one pillar (will, revocable trust, or beneficiary designations). The crux of any estate plan is coordination between all the governing elements.

Designating the Beneficiary as the Estate, Trust, or to a Minor

• Designating a beneficiary to any of the above may create unforeseen consequences.
• A trust document should have language specifically geared toward the handling of qualified plan assets (like 401(k)s, 403(b)s, or IRAs) if it is ever to be named as a beneficiary. If a trust hasn’t appropriately made provisions for holding these types of qualified assets, which by their very nature are subject to specific distribution and tax mandates, trust provisions and governing legislation can often be in conflict. This could create administration problems and inheritance consequences that may not align with your original intent.
• Alternatively, an inheritance structured in trust could provide that a pool of accounts be set aside for a group of beneficiaries. This often means that inheritances/distributions are structured without regard to circumstances unique to a given beneficiary (age, tax situation, outside wealth).
• If money is left to a minor, there will be (by definition) a need to be a trustee or guardian established to oversee the management of that money until they turn of age. If naming such a guardian is overlooked, this can create ambiguity that will ultimately be up to a court to address. Other times, decisions that are not in the portfolio’s or beneficiary’s best interest may be made when a guardian lacking requisite financial expertise is named.

Accounts Without a Beneficiary Form – What to Do?

• Some accounts, like bank deposit and non-retirement investment accounts, don’t offer beneficiary designation forms. In this case, the ownership/titling of the account indicates how assets will pass upon an owner’s death (and yes, it supersedes a will). If the account is titled jointly, the surviving joint owner receives the asset outright. If it’s titled in the name of a revocable trust, then the trust is the effective owner and beneficiary. If the account is owned individually, it becomes a “probate asset,” and the court will dictate how it will be distributed (typically by looking at the will for direction).
• Suppose you want to avoid the time and cost of probate. In that case, you can add a “Payable on Death” (POD) or “Transferable on Death” (TOD) assignment (similar to a beneficiary designation) to your account. In this case, the account will automatically go to the person you named instead of being subject to the probate process. Still, the ownership/titling of the account supersedes any TOD/POD designation. For example, a joint account first goes to the surviving joint owner. At the surviving owner’s death, it will pass according to the TOD/POD.

Beneficiary designations come with varying degrees of considerations and complexities. You should work with your financial advisor and estate attorney to ensure your wishes plan is aligned 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 you will get a fiercely loyal advocate. For more news and information on wealth management solutions, visit CAISSA Wealth.