A wise steward plans for the future. That means not only setting aside money for your retirement years but also planning for what happens to that money — and your other assets — when you die.
Preparing a will (or a trust if applicable) can help protect the loved ones you leave behind from emotionally wrenching legal struggles and costly financial consequences. But don’t neglect another crucial estate-planning task: naming beneficiaries for your various investment and bank accounts.
Beneficiary designations, along with property titles, take precedence over a will. That means you can pass significant assets to your spouse or other beneficiaries without having to go through “probate” — the sometimes lengthy legal process for validating a will. Properly executed beneficiary and title decisions can keep assets away from creditors, reduce estate expenses, speed up distribution of assets, or even purposely slow down distribution for situations in which it would be beneficial to do so.
Definitely not one-size-fits-all
Many options exist for naming beneficiaries and titling assets — too many to cover in this brief article. To make the best decisions, consult with a financial advisor and/or an attorney who has expertise in this area. The information below will give you an overview of some of the options available.
- Bank Accounts
Joint checking and savings accounts will pass to the survivor if one of the account owners dies, but you also should name a beneficiary to keep the money out of probate in the event of both of your deaths. Such beneficiary designations are typically made on a “Transfer on Death” (TOD) or a “Payable on Death” (POD) form. As the name suggests, with a Transfer on Death arrangement, the ownership of the account would transfer to the beneficiary. In a Payable on Death arrangement, the account is liquidated and the proceeds are disbursed to the beneficiary.
- Retirement Accounts
With IRAs, a major consideration is whether the person receiving the money will qualify as an “eligible designated beneficiary.” If so, the distribution of the proceeds can be “stretched” over his or her remaining lifetime (based on IRS actuarial tables). Being able to stretch the payout this way reduces annual taxes while also allowing the account to continue to grow over a long period of time.
Those who qualify include spouses, chronically ill individuals, people with disabilities, and beneficiaries who are relatively close in age to the benefactor (typically a sibling). A minor child (but not a grandchild) can “stretch” distributions, but only until reaching the “age of majority” (18 in most states, 26 if still a student).
A spouse beneficiary has the option of rolling the money into his or her own account or transferring it to an inherited IRA. There are different tax implications depending on the spouse’s age and when he or she begins taking distributions.
Beneficiaries who don’t qualify for the “stretch IRA” option must receive the account proceeds in full over the course of no more than 10 years, which can create a significant tax liability.
Passing annuity assets to a beneficiary in the most tax-efficient manner can be complex. It’s wise to get assistance from a financial professional experienced in such matters. One option to ask about is naming a beneficiary “with restricted payout” — a means of stretching distributions over a set period.
- Life Insurance
Married couples typically name each other as the primary beneficiary and children as secondary (or “contingent”) beneficiaries. However, naming a trust as a secondary beneficiary may be a wise approach for managing a large distribution to minor children. The trustee is empowered to manage and release funds for specific purposes while children are minors. Further, the trust document could designate the age (or ages) when adult children can receive distributions.
- College-Savings Accounts
When setting up a 529 plan, you will be asked to name a “successor owner” to take over responsibility for the account in the event of your death. Most 529 plans don’t allow spouses to establish accounts as joint owners, making one’s spouse a logical choice to name as the successor owner.
What happens if you name your spouse as successor owner but you both pass away before the money in the plan is used? Some plans allow you to name a contingent successor. (If not, ask your plan administrator.) A minor child’s guardian likely would become responsible for the account.
- Houses and Automobiles
Proper titling is important for these property assets. If you’re married, you’ll probably want to put both of your names on the title to your home and vehicle(s). That way, should one of you die, the other spouse will own the property without it having to go through probate.
- Be aware that laws related to titling real estate vary from state to state. In some cases, your best option will be to title a house as “joint tenancy with rights of survivorship.” In community property states, the equivalent is “community property with rights of survivorship.”
- (You may benefit from titling your property as “tenancy by the entirety” if the designation is available in your state. As with “joint tenancy with rights of survivorship,” upon one spouse’s death, ownership of the property remains in the hands of the surviving spouse. However, one added benefit of “tenancy by the entirety” is that if one spouse is sued, the lawsuit can’t force the sale of the property unless both spouses agree to the sale.)
- If both husband and wife die, their property typically becomes part of the estate. The executor will manage the property according to provisions of the will, including selling property and distributing the proceeds to heirs named in a will.
Keep information up-to-date
There is much to take into account when designating beneficiaries and titling assets. It is wise to make these decisions with the aid of a financial and/or legal advisor. Further, we suggest you create a list or spreadsheet, recording each of your major assets, who the beneficiaries are, how property is titled, and the date last verified. Making such a listing will aid you in handling these issues now, and it will be helpful later when an executor is called upon to settle your affairs.
Life is filled with change (children are no longer minors, beneficiaries may have died or divorced, etc.), so review your titling decisions and beneficiary list every few years. Doing a little bit of paperwork every so often may save a lot of headaches — and possibly heartaches — down the road.