Don’t Disinherit Your Loved Ones

We are all terminal. While we know that death is a part of life, many times it catches us off guard. Even when it has been embraced and prepared for, the emotional gamut runs wide and deep. From the financial perspective, there are things we can do to minimize the complexities of wealth transfer by simply understanding how to properly use beneficiary designations on retirement accounts.

On contractual documents such as life insurance policies, annuity contracts, IRA’s and qualified retirement plans such as 401 (k)s, there are beneficiary designations filled out when the account is opened or policy created. You may have multiple beneficiaries with family members, friends or even charitable organizations named on your custodial agreements. They may be listed as primary or contingent. The contingent beneficiary will receive the asset if the primary beneficiary is deceased.

You can also add the wording “per Capita, or Per Stirpes” to your designations. These terms are used when an individual names a secondary or alternate beneficiary to receive assets. It takes effect when a primary beneficiary predeceases the account owner. Per Capita, latin for “by the head” is used when you want your primary and contingent beneficiaries to all receive equal shares of the inherited asset. Per Stirpes, latin for “by the root” would be used when you want the beneficiaries heirs to only receive the deceased beneficiaries portion of the assets. For example, a grandmother passing assets on to three children and one of them predeceases her, their share of her assets would be distributed equally amongst the deceased child’s children.

A will is NOT a beneficiary form. Keep in mind that on contractual documents, the beneficiary designations named normally prevail over your will. It is always good to review your beneficiary designations to make sure you are staying up with life events. I have heard tragic stories of children being disinherited because names where never changed. Our lives are growing increasingly complex and family dynamics shift more often than not. Make sure you keep up with the changes that happen in your life. Some basic paperwork can eliminate future complications.

When an account owner passes away, what steps need to be taken? When the time is right, family members should locate financial records that show the beneficiary designations. The financial firms overseeing the account will have copies. The institution holding the IRA or retirement assets will ask you to supply a certified copy of the account owner’s death certificate and a notarized affidavit of domicile.

If you are named as the primary beneficiary on a retirement account, there are four general options for the assets, regardless of what type retirement account it is. You can open an inherited IRA and transfer or roll over the funds into it. You can roll over or transfer the assets into you own, existing IRA (spouse only). You can liquidate the account and get a check. You could disclaim all or part of the assets.

This is where things get complicated and you want to be very careful to discuss limitations or consequences with your trusted advisors before making any decisions. Is the beneficiary a spouse, or non-spouse? Is the beneficiary a trust? Was the account owner taking distributions from the account? What is your personal financial situation and how will this tool fit into your overall plan? What will the tax consequences be? Would a ROTH conversion be appropriate?

Inheritors of retirement accounts have until September 30 of the year following the original account owner’s death to review and remove beneficiaries. By December 31st of the year following the account owner’s death, the assets need to have been moved to new beneficiaries and is also the deadline for a RMD (required Minimum Distribution) to be taken from the inherited account.

Be prudent and have the appropriate discussions about this type of planning with your family members. We can take a bit of the sting out of death by preparing financially as best possible.

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