Beneficiary Designations: Do You Know Who’s Who in Houston?

If you don't remember who your beneficiaries are for your investment accounts, insurance policies or annuity contracts, then you need to carve out some time to go through your accounts and see who you named as your beneficiary. If it's been a while, you may be in for a rude awakening.

Beneficiary designations allow certain assets owned by an individual to transfer efficiently at her or his passing. These include retirement accounts like IRAs, Roth IRAs, 401(k)s, 403(b)s, 457(b)s, and pensions, as well as life insurance death benefits and the residual value of annuities.

These types of assets with designated beneficiaries will transfer automatically, despite anything written to the contrary in a person's will or trust. These assets with designated beneficiaries are also excluded from the decedent's probate estate unless the "estate" is the designated beneficiary.

Owners can designate both primary and contingent beneficiaries. The primary beneficiary inherits the asset, but if he or she dies before the owner, then the contingent beneficiary will be the new owner. If you don't name a contingent beneficiary, the asset will go into your general estate for distribution, which is what you're trying to avoid in the first place by naming beneficiaries.

There are no restrictions on how many beneficiaries can be designated to inherit an asset. You can split your 401(k) 50-50 if you have two children, or 60-40 or 90-10. You can also name a charity as your beneficiary, which can be a nice way to transfer assets to a special organization at your passing. Charities don't pay income tax, so they would get 100% of the value of the asset. If an individual inherits this asset, he or she will be liable for income tax right away or as funds are distributed.

A trust can also be designated as beneficiary to provide control over the asset to someone other than the inheritors. Many times it's used when minor children or individuals with disabilities are to be the ultimate beneficiaries. You should work with an estate planning attorney if you go this route, as the tax and distribution rules are complex.

Review your current beneficiary designations now to be sure they reflect your desires. You also should look at them whenever life circumstances change, like a marriage, birth, divorce, or death. You can change a beneficiary designation at any time.

Your estate planning attorney can help you make sure that your beneficiary designations align with your estate plan. For instance, if one child is the sole beneficiary of a million dollar investment account, you may wish to leave assets that are governed by your will to another heir.

For additional information on beneficiary designations and other estate planning topics in Houston, please click here to visit my website.

Reference: Inside Indiana Business (February 29, 2016) "Who Are Your Beneficiaries?"