About Beneficiaries
What would happen to your financial assets if you die? Would they automatically go to whom you want? Naming beneficiaries for all of your financial assets is not only an important responsibility but also an essential requirement for helping to protect the future of your investments. In addition, if available, you may want to consider beneficiary continuation as a simple way to make your money mean more to subsequent generations.
A beneficiary is the person, institution, trustee, or estate you designate to receive benefits from your annuity contract, life insurance policy, IRA, or other financial asset in the event of your death. The following section outlines important considerations to keep in mind when naming beneficiaries and provides an overview of beneficiary continuation and how it works.
Naming Beneficiaries
When asked to name a beneficiary for any of your financial assets, you might name your spouse or your children. It seems like a pretty simple one-time thing, right?
Not exactly.
What happens if:
- Your spouse dies before you do?
- You name your "spouse" as beneficiary but not by his or her name?
- You and your spouse both die (in an accident, for example)?
- You are not married but want to name your lifelong companion?
- Your children are minors when you die?
- You subsequently get divorced?
It's important to take many factors into account when naming a beneficiary. By carefully considering potential problems and ambiguities, you can be sure that your last wishes are properly carried out.
Get a Will
If you do not have a will when you die, your assets may end up going to your estate, which may then go into probate. In that case, it is likely that there may be a delay in the distribution of your assets. Legal fees and probate court costs can also reduce the amount of your assets.
Regularly Review and Update Beneficiaries
Our lives are very busy and continuously changing, often in unanticipated ways. The child you name today as your beneficiary may one day have a brother or sister. People whom you may want to include (or exclude) as beneficiaries will come into and go out of your life. That's why it is a good idea to review and update your beneficiary designations at least once every five years.
Don't Name Minors as Beneficiaries
Generally, minor children will not be paid insurance proceeds until age 16 to 18. If a child is a minor, the court generally will name a guardian - and perhaps not a guardian you would choose. In any case, a guardian is subject to court supervision and has limited powers as to distributing funds. Consequently, if you want your estate to go to minor children, it may be better to set up a trust or other distribution method for them.
Plan for Contingencies
In the event that a primary beneficiary is deceased, it's a good idea to have a contingent or secondary beneficiary. You should also consider what should be done for additional children or dependents who may enter your life after you have named your primary beneficiaries.
Be Specific
If you simply state that your "wife" is a beneficiary and do not specifically designate her by name, an ex-wife could make a claim on your life insurance policy, IRA, or annuity. Be sure to designate beneficiaries by their full legal names and Social Security numbers to ensure that the right beneficiaries receive their due – and can be more easily located.
Special Considerations for Non-traditional Families
Non-married couples must take special care to ensure that their assets are distributed according to their wishes. Even if you have a will, your life partner may not automatically be the beneficiary of your IRA, pension plan, life insurance, or annuity. Be sure he or she is specifically identified as your beneficiary in all such cases.
Naming beneficiaries requires careful consideration and planning. Your GAFRI financial professional can help you develop a plan that ensures your wishes are properly carried out. You should also consult an independent attorney or tax advisor for additional guidance.
Beneficiary Continuation
You have planned carefully for your retirement. And, the rewards for that wise planning can surface in the form of IRA or annuity assets that you may not need. Taking only the Required Minimum Distribution (RMD) from your IRA or owning a non-qualified annuity contract may help protect you from a sizeable tax liability and leave funds for your beneficiaries. Keep in mind, however, that receiving an inheritance in a lump sum can cause significant tax burdens for the ones you love.
Thanks to recent changes in tax rules, your beneficiary may now be able to stretch out payments and help reduce the tax burden. All you have to do is name your beneficiaries. At Great American Financial Resources®, Inc., we call this a beneficiary continuation option. A beneficiary continuation is simply a death benefit option that allows beneficiaries to receive distributions over the course of their lifetime (even if you have previously started taking distributions from your IRA based on your own life expectancy). This option can provide both you and your beneficiaries with significant benefits.
Beneficiary Continuation Option Benefits
Having a beneficiary continuation offers you these potential benefits:
- Tax control of annuity distribution – With lump-sum payouts, much of the distribution may end up paying in taxes. Stretching out payments across beneficiaries’ lifetimes allows the money to grow tax-deferred, spreads the tax liability across many years, and may avoid higher tax brackets. Beneficiary continuation can be a great financially planning tool.
- Income flexibility – Beneficiaries can choose to increase payout amounts or cash out at any time. Remember that the beneficiary continuation option is revocable. Owners can change beneficiaries at any time prior to their death, and beneficiaries can still opt to take a lump sum.
- Transfer of wealth to multiple generations – Beneficiaries may have the opportunity to take only an amount equal to the RMD. If a beneficiary dies before the end of his/her payment term, any remaining balance can be passed on to future generations.
How to Get Started
It's easy to stretch your IRA or non-qualified annuity for future generations. However, it's important to plan ahead. Below are some steps you can take if you are interested in beneficiary continuation:
- Choose your beneficiaries and the percentages you would like to allocate for them. These decisions are revocable and can be changed at any time during the owner's lifetime. Only non-spouse beneficiaries are eligible for a beneficiary continuation option because spouses have successor owner and rollover rights.
- Contact your financial professional or tax advisor to help stretch your IRA or non-qualified plan for future generations.
While the concept of stretching your IRA or annuity seems somewhat simple, we recommend consulting your financial professional to learn more details about a beneficiary continuation option and your opportunities to leave a lasting legacy for future generations. You should also consult an independent attorney or tax advisor for additional guidance.
