Are Your Beneficiary Designations Behind the Times?

Linda Sommers Green

Attorney & Counselor at Law

      (303) 984-9900

When was the last time you looked at the beneficiary designations on your IRA or employer-sponsored retirement plan? If Ronald Reagan or Bill Clinton was in office or “grunge rock” was all the rage, there’s a good chance an update is in order.

Many people don’t realize that beneficiary designations take precedence over instructions in a will or trust, so it’s vital to keep them up to date if you want your estate plan to work properly. If you neglect to name a beneficiary, your assets could be cashed out and added to your general estate when you die.  If you name the wrong beneficiary or if you name the beneficiary incorrectly, it may jeopardize the intended distribution of the asset.

Family Status

             Any number of life changes—such as a marriage, divorce, birth, or death—can alter the way you want your assets handled when you’re gone. It is particularly important for blended families with more than one set of parents or children, to carefully designate beneficiaries and then discuss your legacy plans with your loved ones to help alleviate confusion and discord among your heirs.

             If you are divorced and/or remarried, double check the beneficiaries on your pensions, IRAs, and insurance policies to make sure your ex-spouse isn’t still named as the beneficiary.  Courts have ruled that even after you are divorced, if the ex-spouse’s name is listed as the beneficiary, he or she could still be entitled to the asset.

Secondary Beneficiary

             If your spouse is your primary beneficiary, it’s generally a good idea to name a secondary beneficiary in case your spouse dies before you do. If your spouse outlives you and does not need the money in your account, he or she may then choose to disclaim the asset, and let it pass to the secondary beneficiary without affecting the tax-deferred status of the funds.

Stretch IRA

             IRA beneficiaries can now choose to “stretch” distributions from an inherited IRA over the course of their lifetimes, instead of cashing out and paying income taxes immediately. If your beneficiary is a child or grandchild, this could allow the bulk of the asset to accumulate tax deferred for years or decades.

             Over time, your retirement plan assets can grow to a significant sum. By regularly reviewing and updating your beneficiary designations, you will help ensure that your valuable savings will be distributed according to your wishes and provide your heirs with the greatest benefit.

             There are extremely complex tax rules regulating the distributions of inherited IRAs.  See a knowledgeable tax professional or estate planning attorney to make sure you have correctly named beneficiaries to take best advantage of these new rules.

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