Maybe this happens so often because it’s so simple. Take the time to review your beneficiary designation, unless you want to give an ex-spouse a nice surprise.
The latest generation of retirees has spent years planning, saving and investing for their version of retirement, which they expect to be very different than their parents’ retirement. But whether you plan on hiking the Himalayans or starting a new business, there’s one detail that can’t be changed once you have passed away: your beneficiary designations. Why is it so important? Because your will does not govern assets with a beneficiary designation.
The (Kankakee IL) Daily Journal’s article, “4 reasons baby boomers should review beneficiary designations,” gives us some common beneficiary designation mistakes to avoid.
The estate as a beneficiary. People will inadvertently name their estate as the beneficiary of their retirement accounts by either directing their retirement assets to be paid "pursuant to the terms of my will," failing to complete their beneficiary designation form or forgetting to name a new beneficiary after one dies. When this occurs, these assets are typically paid to the estate by default, which is not the best beneficiary for IRAs and retirement plans. These assets normally avoid probate, but become subject to probate when paid to the estate. The probate process can be lengthy and expensive. These assets might also have to be liquidated and paid to the estate within five years after a person's death.
Individual beneficiaries can have IRA assets paid over their lifetimes to stretch their tax liability over many years. However, estates do not have this option. One more thing: estates are subject to a much higher income tax rate than individuals, sending more money to the IRS than is necessary. Avoid this and make certain that you have an up-to-date primary and contingent beneficiary designated for all of your retirement accounts.
Trust as a beneficiary. Some people use trusts to affect a transfer of wealth and to maximize all available gift, estate, and generation skipping tax exemptions. However, there are several issues with having retirement assets paid to a trust. The "stretch" rules generally don’t apply to trusts unless the trust is drafted to be a "look through" trust. In that case, the IRS lets you "look through" the trust and "stretch" the IRA to the trust over the life expectancy of the oldest trust beneficiary.
It can also be pricey to establish and maintain trusts. These fees can significantly reduce the amount that the ultimate beneficiaries will receive. Finally, trusts are subject to the 39.6% tax rate when the income exceeds $ 12,400. By contrast, married taxpayers filing jointly don’t reach that rate until their income exceeds $366,950, which means if the IRA is worth more than $ 12,400, over a third can be lost to the IRS.
Speak with your estate planning attorney before you designate a trust as a beneficiary of a retirement account.
Ex-spouse as a beneficiary. This is not usually done intentionally, but it does happen. People forget to update their beneficiary designations after a divorce. Some think that the divorce decree will automatically negate their prior beneficiary designations. This is not true.
Per stirpes or per capita. IRA and retirement assets aren’t always distributed as designed. Most IRAs will allow the owner to designate multiple beneficiaries. If an owner designates his or her children as equal beneficiaries, if one predeceases the owner or "disclaims" the inheritance, the remaining primary beneficiaries will usually receive the balance of the IRA and not the children of the deceased beneficiary.
Unless you have some unusual ulterior motives, you can save your heirs a lot of grief and frustration by reviewing all of your assets, checking to see which accounts have beneficiary designations and make sure that the beneficiaries you’ve selected are still the ones you want to benefit from your years of hard work. Review this information with an estate planning attorney to ensure that your wishes are not lost because of a simple oversight.
Reference: The (Kankakee IL) Daily Journal (January 31, 2017) “4 reasons baby boomers should review beneficiary designations”