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Money Management: Beneficiary review

By Sharon L. Thornton
BridgeTower Media Newswires

beneficiary_mainThe most important gift that you can leave your heirs is a well-thought-out transition of property.

Circumstances change in life. It could be divorce, death, deciding to no longer enable grown children to live beyond their means or different causes that initiate a change in beneficiaries or the form in which you choose to leave accumulated wealth.

If the deceased owned property solely in their name, the estate must usually go through probate to transfer the property into the names of beneficiaries. Also when beneficiaries are not named or have predeceased, probate is necessary; however, this can be avoided by several different methods. It could be transfer on death, joint tenancy, and payable on death, or by a designated beneficiary. In this article we are going to discuss the pitfalls of naming beneficiaries or having an unintended beneficiary.

The most common listed beneficiaries are found on life insurance products, 401K (or similar “passable’ retirement plans) and IRA or IRA rollover accounts. Most individuals name a beneficiary at the onset of an event that triggers the naming of a beneficiary, such as a new job, additional insurance, starting an IRA account or participating in an employer-sponsored retirement plan. Beneficiaries can also be named in the joint account or transfer on death, as the survivor named will inherit the property. Unfortunately, we all live in the present and we may not revisit the choices that we made multiple years ago. Sometimes we have changed our mind or life has changed. Other times we may have not made a wise choice in the beneficiary.

Let’s review some common issues:

Failing to name a beneficiary. If you do not name a beneficiary, you are almost guaranteeing that the asset will go through probate after your death. You are incurring extra expenses, and your real wishes may or may not be carried out.

Failing to name a secondary beneficiary. This is called a contingent beneficiary. If you name your wife as your beneficiary and you should both die at the same time, what happens now? It would be the same as not naming a beneficiary at all.

Not keeping beneficiaries up to date. It will not help to have named someone that is already deceased as your beneficiary. Ex-spouses’ can hit the lottery if you divorce and you have not changed your beneficiary.

Naming a “special needs” beneficiary. Many special needs individuals could lose their benefits upon receiving an inheritance. It is best to establish a special needs trust instead.

Naming someone who you know has “money issues.” If you know your beneficiary has the tendency to overspend and you want to make their inheritance last, once again consider leaving money in a trust.

Naming your estate as your retirement plan beneficiary. This limits your options. The entire plan balance can become taxable. You are giving up the ability to have a spousal IRA rollover along with the ability to take distributions based upon the inheriting spouse’s age.

Naming a single child on an account. Many times a parent may have a child included on various accounts so that they can assist in financial functions later in life. The intent may not be to leave the entire amount to this one child but to have the account distributed according to your will. If the child on the account wants to keep the entire account, they can.

Making sure there is not a conflict between your will and the manner that you have designated beneficiaries. Designated beneficiaries will supersede your will.

Careful thought and action will ensure that your assets are distributed in an efficient fashion and according to your wishes. Don’t forget to review all beneficiaries as life changes.

Sharon L. Thornton is chief compliance officer/senior director of investments for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. The company is based in Pittsford, New York.