CPA & Business Advisory Blog


Check Beneficiary Designation Forms

What to Look For

Anyone having funds in a qualified retirement plan or IRA should have designated at least one beneficiary for the funds should something happen to the owner. Uninformed choices at the set up or because of changes in circumstances can cause the beneficiary choices to be inappropriate today. Review your beneficiary designation forms and look for these common mistakes:

  1. No named beneficiaries
  2. Naming your will or estate as your beneficiary
  3. Minor beneficiaries
  4. College age beneficiaries
  5. Ex-spouse as a beneficiary
  6. No contingent beneficiary
  7. Special needs individual as a beneficiary
  8. Not naming a trust as IRA beneficiary for asset protection
  9. Naming a generic trust as beneficiary
  10. Elderly parents as beneficiary

Failure to make specific elections on benefit forms can make it difficult for your beneficiaries to gain access to funds. It can also cause them to incur a tax liability that you never intended. Beneficiary designations override your will, so they need to be carefully coordinated with your overall estate plan.

The Opportunity

First, you should periodically review your beneficiary designations, especially when there is a change in marital status, births, and 401(k) or IRA rollovers. Keep in mind that beneficiary designations on retirement plans don’t carry over when you roll a retirement plan to a new employer’s plan or convert a regular IRA to a Roth IRA. Review the forms for all of your benefits carefully. Make sure your beneficiaries are listed with complete information.

Next, pay attention to the other elections on your forms. You can determine how you want your beneficiaries to receive payments and help lessen their taxable burden. For example, with your investments accounts, you may choose that your beneficiaries receive installments for a fixed period of time as opposed to a lump sum, which incurs heavy, immediate taxation. You might want to elect “life income,” which means that beneficiaries receive payments over the course of their lives. A “stretch” IRA, can be a powerful wealth generator and allows you to stretch your IRA over several future generations.

Related: Choose the Location of Your Residence Carefully

The Benefit

Many of us would likely feel unsettled knowing that our lifetime savings could be cashed out and spent so quickly. We’d rather it continue to work as a secondary source of income for our loved ones. Fortunately, you can have input on how your funds work by making specific elections on your beneficiary forms.

So, take into account the size of your retirement savings and imagine how your beneficiaries will handle the important implications of inheriting this money, including taxation. Communicate your wishes to your beneficiaries. Let them know your wish to see them utilize that inherited account over their lifetimes or to use the proceeds in some other way.

Finally, consider naming a trust as beneficiary to give you maximum control over your tax-deferred money. Instead of being paid to an individual, distributions will be paid into a trust that contains your specific written instructions about who will receive this money and when. For example, your trust could provide income to your surviving spouse for as long as he or she lives. You could even be as specific as providing periodic income to children or grandchildren while keeping the balance safe from irresponsible members of the immediate family or their spouses and creditors.

There are many other meaningful ways to stretch your dollar in our new e-book: 12 (More) Great IdeasDo you have a question about how this information applies to you? Email Jim Sacher, CPA or call him at 440-449-6800.

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