subject: Keep All Your Beneficiaries Updated On All Your Accounts [print this page] Efficiently getting your property to the beneficiary of your choice takes a little know-how and awareness. Generally speaking, pensions, qualified plans and life insurance go to their designated beneficiaries immediately at your death; they don't have to be probated. But you've got to be on the ball about who's designated as a beneficiary and where.
Suppose you draw up a will where you designate your beneficiaries for your assets. Have you taken care of them? Not if your IRA is a major asset and you never assigned a beneficiary in your IRA document.
Or, you've divorced and have a new wife and haven't changed your life insurance designations, your IRA beneficiaries, or made provisions for your pension payouts. Or, your children have divorced or perhaps died. This probably requires more changes.
Keeping up to date on all your accounts that require beneficiary designations is essential to assure that your current intentions and wishes will be carried through when you die. Here are a few cases to consider too.
*Case 1: missing beneficiary designation on your qualified plan:
When you die, your estate becomes the 'first' beneficiary of your 'missing beneficiary' IRA. Unfortunately, that defeats most of the tax-sheltering benefits that an IRA can afford its beneficiary. Your IRA suffers two adverse circumstances in this situation:
1. Your IRA assets must now go through probate and be subject to estate taxes. And then
2. Your beneficiaries (excluding your spouse) must distribute (withdraw from) their inherited IRA from you within 5 years of your death.
The first circumstance can tie up use of your IRA in the probate process and add fees. If your estate is sufficiently large, estate taxes can rob some if its assets.
The second forces distribution of your IRA assets at ordinary income tax rates to your nonspouse beneficiary. This prevents the tax-sheltering of its growth over the 'stretch years' based on the beneficiary's remaining life expectancy. They'll lose a lot of what you left them to income taxes if they must take it all in 5 years while they earn a decent income on their own.
*Case 2: A non-updated Beneficiary of your Qualified Plan or your Life Insurance:
You have a qualified plan for which you originally assigned to a beneficiary who no longer is your choice. If you've married and don't change your beneficiary designation, then the original beneficiary will inherit your qualified plan. That's true for your life Insurance benefits too. It's extremely difficult for your estate to argue that these accounts are going to the 'wrong' beneficiaries.
*Case 3: A non-authorized change in beneficiary on your pension
If your wife is assigned as beneficiary of your pension, you can't change to a new beneficiary without her permission. She must sign a written waiver. Of course if you divorce, then your divorce agreement should divide the pension benefits accordingly.
What then remains of your pension may allow a new wife as beneficiary; you'll have to check with the pension administrator to be sure what you can do.
Don't wait to update all your accounts beneficiaries before it's too late. Review all your accounts today.
