The Importance Of Properly Naming Beneficiaries For Your Retirement Plans

Who should you name as the beneficiary of your retirement accounts?

Answer:  Those who you want to inherit your retirement savings.

Taxes aren’t everything.  Yes, they need to be planned for,  but they should not change your choice of beneficiary.  You should not name beneficiaries just because it might be better tax-wise.  Name the people you want to inherit your assets and then do the planning to make sure that those people inherit with the best possible tax plan.

Name Both Primary Benficiaries and Contingent Beneficiaries.

Naming beneficiaries always means naming both primary beneficiaries and secondary benficiaries (contingent benficiaries.)  Contingent beneficiaries will inherit if the primary benficiary dies before the IRA owner, or if the primary beneficiary disclaims (refuses) his or her inheritance, so that it can pass to the named contingent benficiary.

Think of the contingent benficiary as a back-up plan – like a Plan B.  Always name a contingent beneficiary in addition to the primary benficiary.

If you are married: 

Generally if you are married, you will probably want to name your spouse as your primary beneficiary, unless your spouse has sufficient assets and does not need to inherit additional funds from you.  You would probably name your children as contingent benficiaries.

Consider using life insurance to take care of your spouse so that he or she can inherit those funds tax-free.  You’ll need to work with an insurance professional on this. 

Planning is essential to make sure your funds go exactly to the people you wish.  With a married couple, if no one dies, then even with poor planning, property will probably end up with the surviving spouse.  With an unmarried person, there is no such “automatic” type beneficiary, so you have to make sure that you name exactly the people you wish to inherit your savings and other property, and be careful to also include contingent beneficiaries.

There is also more likelihood of an estate tax since there is no spouse who can inherit estate tax-free under the marital deduction.  This should be planned for with life insurance if you are concerned about the financial security of your loved ones after you die.

Work only with an experienced life insurance professional that can set up the life insurance outside your estate making the life insurance proceeds both estate and income tax-free to your loved ones.

If you are an unmarried couple

Planning is essential for unmarried couples since blood relatives may have better rights to your property than your partner, if nothing is specified otherwise.  Planning can also avoid post death problems where your relatives might contest property going to your partner.

Same sex couples legally married under state law are not entitiled to the tax benefits married couples have under federal law.  Under federal law for example, your partner can’t do a spousal rollover if he or she inherits your IRA, the way a married couple can.  So for you, it is extremely impoortant that you name your partner specifically for all property that you want to pass to him or her (since he or she will not have the spousal benefits and protections that married couples have under federal law.)

Here again, you should consider using life insurance to provide post-death financial security for your partner, and to protect against estate taxes when the first partner dies.  While married couples can leave each other unlimited amounts of property at death that is tax-free under the marital deduction provision of the tax code, that marital deduction is not available to a surving partner of an unmarried couple.  It is essential to provide for taxes and financial security of an unmarried partner.

Life insurance and the stretch IRA (as mentioned in a previous post) are a perfect combination for this .  Make sure you work with a knowledgeable life insurance and planning professional so that the life insurance is set up outside the estate.  This way the life insurance money received will be estate and income tax-free when it is needed most.