When I was 20 years old and paying my way through college, I found delivering pizza was a great way to make a decent living. I always asked for the day shift on Friday and Saturday because it would be mostly deliveries to businesses where they had the tendency to tip better than residential deliveries. One side benefit of the weekend shift was the ability to visit some cool stores and venues I otherwise would have never seen.
Every Saturday a local Toyota dealership would order around 2:00 pm. While waiting for the service manager to bring payment for the pizza, I had time to browse around the showroom floor. At 20 years old I was pretty easy to impress but there was one particular car that always caught my attention. Sitting there in the middle of the floor was a shiny black Toyota Supra. I would think to myself, “wow, how cool would it be to own one of those someday”. It was the pinnacle of all cars and at that moment, life, liberty and the pursuit of happiness all wrapped themselves into this one amazing vehicle.
What does that experience have to do with beneficiary planning on investments and IRA’s? Not much other than expresses how strongly I feel it is the single most important estate planning tool you can use. It is the pinnacle of all estate planning tools.
So, what is a beneficiary? It is someone (or something – a legal entity such as a trust) that is entitled to money upon your passing. The beneficiary designation takes precedence over what is in your Will. Let me repeat that because it is very important, Beneficiary designations take precedence over what is in your Will. That means, if your ex-wife is listed as the beneficiary of your $1,000,000 IRA and you pass away, it does not matter what your Will says, in most cases your new spouse would not be entitled to that money!
Here are some of the types of accounts that typically have beneficiaries associated with them:
- Roth IRA
- Traditional IRA
- SEP IRA
- SIMPLE IRA
- Term Life
- Whole Life
- Universal Life
- Employer Paid Life (also called Group Life)
- Fixed Annuities
- Indexed Annuities
- Variable Annuities
- Annuities inside of an IRA
- Annuities not inside of an IRA (non-qualified)
TOD Accounts (Transfer on Death)
Here are the 9 reasons why you must name proper beneficiaries:
- It cost nothing but a few minutes of your time – Generally you can change beneficiaries by simply logging into the product sponsors website or requesting a change of beneficiary form through your Advisor or agent. Most forms require the beneficiaries name, date of birth and address.
- Save on probate cost – While cost vary based upon complexity and size, Attorney’s will typically charge 2% - 4% of an estate to settle the affairs. There are certain times where the legal expertise is helpful and even necessary but if you can save money for your heirs by simply listing them on the beneficiary form often that is more efficient and cost effective.
- Keep matters private – When a will is probated it becomes a matter of public record. Anyone has the ability to look at how assets were divided, how much money the deceased person had, etc. Often this can lead to fighting between siblings, previous spouses or other family members. The beneficiary designation provides privacy and allows you to divvy up assets as you deem appropriate. You could list someone as a beneficiary on account A but not account B and that beneficiary would have no idea how much money was in account B upon your passing.
- Quicker than probate – I’ve seen firsthand how long it can take to probate an estate. A year or longer is not uncommon and during that time, depending on the complexity of the estate, assets can be tied up or not accessible. On the other hand, individual beneficiaries, when properly designated can access their portion of benefits as quickly as a week or two after death.
- Tax benefits – (Number one reason to list beneficiaries) This is one of the most overlooked yet powerful reasons why it is so important to properly list beneficiaries on your accounts/policies. On retirement accounts, beneficiaries may continue deferring taxes over their lifetime through Required Minimum Distributions (RMD’s) based upon the life expectancy of the inherited IRA owner. (also called stretch IRA). PLANNING TOOL: If you own a non-qualified annuity(non-IRA) you could even allow your beneficiaries to continue tax deferral utilizing what’s called a non-qualified stretch.
- Easier for Heirs to settle estate – Settling an estate can be complicated and time consuming. Listing proper beneficiaries eliminates many of the road blocks to an efficient transition. It’s quick, you can transition the beneficiary assets and cross that item off your list allowing you time to focus on the non-beneficiary assets. No fighting among family members. Each beneficiary can stretch or take the lump sum, it is up to them.
- Ensures people get what you want after passing – Do you want your 3rd daughter to get a little extra money or maybe your nephew to have an extra $15,000. Listing these specific financial bequeaths on your beneficiary forms is a quick and easy way to ensure money goes where you want it to. PLANNING TOOL: Have an ex-spouse listed as a beneficiary? It’s important to remember, regardless of what your Will says, the beneficiary form dictates how the associated asset is distributed. Have someone who’s passed away listed as a beneficiary? It’s important to change that information. Otherwise the distribution of that portion of your money can become very complicated.
- Less expensive to change than a Will – Think of all the reasons why you might want to change who gets money when you pass. Marriage, divorce, birth, death, etc. are all reasons why someone might change how money is split upon passing. It’s a lot easier (and cost effective) to simply fill out a new form vs. calling your attorney, making the request, signing the updated documents and paying for the services.
- Opportunity to control from grave – There isn’t much you can do from 6 feet under but with proper beneficiary designation you have the opportunity to give your assets direction, purpose and protection after you pass. Your beneficiaries have the opportunity to take advantage of stretch IRA options, trust provisions or restricted beneficiary payouts.
How do you properly complete a beneficiary form?
- Do not leave it blank
- Think about whom you would like as the Primary beneficiary(s). This person/entity receives the money if you pass away.
- Next, think about who you want to be your Contingent beneficiary(s). They would only receive the money if you and the primary pass away at the same time or the primary pre-deceases you.
- For trusts and special designation beneficiaries, consider asking your legal counsel for proper wording.
What happens if you leave the beneficiary form blank? Non-retirement accounts typically pay to the estate. Retirement accounts pay based upon the plan documents. This could be spouses first then children, it could be the estate or it may be something else. Important to remember…it might not be who you want!
If you have not reviewed your beneficiary designations in a while (don’t forget about group life insurance policies through your employer) consider taking a few minutes to evaluate who they are and if that still meets with your long-term goals.
P.S. I never did buy that Toyota Supra (I’d look silly in it anyways with 6 kids in the passenger seat)!
Spencer Corzine, has been helping clients understand their investments and reach their investing goals for over 18 years. He is a Certified Financial Planner (CFP®), a member of the Paladin Registry and resides in Austin, Texas with his wife and 5 children.
Serving clients in upstate New York, the Austin Texas area and over 20 other states.
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