Revisiting Your Beneficiaries

What do IRAs, 401(k)s, 457s, 403(b)s, SEP-IRAs, Roth-IRAs, annuities, and life insurance policies have in common? They all have beneficiaries. When the account owner passes away, the money in these accounts is distributed directly to the named beneficiary or beneficiaries, no matter what the will or trust states.

More often than you think, people pass away and their assets transfer to people other than whom they intended because the account owner has neglected to update the beneficiaries on the account. For example, if you remarry and update your will or trust but leave your first spouse as your beneficiary on a retirement account or life insurance policy, no matter what your updated will or trust states, the retirement account or life insurance policy will transfer to your first spouse. Therefore, it is important to understand the distinction between the beneficiaries in your will or trust and the beneficiaries listed on a retirement account or life insurance policy, and to review all of your retirement accounts and your will and trust when there are changes in your life.

Depending on your estate attorney, he or she may recommend that you list your trust as your primary beneficiary if you are single and your secondary beneficiary if you are married. (NOTE: For tax purposes, you should always name your spouse as the primary beneficiary.) Some attorneys recommend that you name your children as beneficiaries if they are no longer minors. Naming your children instead of a trust is a bit easier for distribution purposes; however, naming the trust makes sense if not all of your estate is going to your children exclusively or if you wish to have the distribution to your children spread out over several years because the child may not be responsible enough to manage the money as a lump-sum distribution. If you have a blended family, naming your trust as a beneficiary could offer more flexibility in how your estate is distributed rather than naming individuals directly.

It is worth noting that many people and some financial and legal professionals mistakenly assume that naming a trust as beneficiary can disqualify your heirs from using the tax-advantaged form of distribution known as a “stretch IRA”, which allows the deceased to “stretch” the value of the IRA over a longer period of time. However, this is no longer the case, since the IRS changed the regulations in 2002, provided that the trust meets the following requirements:

  • The trust must be valid under state law;
  • The trust must either be irrevocable or become irrevocable upon the participant’s death;
  • The trust beneficiaries who are beneficiaries with respect to the trust’s interest in the plan must be identifiable from the tust instrument; and,
  • Either a copy of the trust instrument or special affidavit must be filed with the Plan Administrator by December 31st of the year after the year of the participant’s death.

Beneficiaries play a major role in your estate planning. Understanding the difference between the beneficiaries listed in your trust and the beneficiaries on your retirement accounts and life insurance policies will help to make sure that your estate transfers according to your wishes.

© Cynthia S. Meyers, Jenny Hood, and Melinda Banister
Letter of News ~ Volume 17

This article was published when Cynthia Meyers of Cynthia Meyers CFP® was with Financial Telesis. Cynthia Meyers has not been with Financial Telesis since 8/11/14 and has no further affiliation with that organization.