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The Beneficiary Review

by Robert W. Tull | January 1, 2015 | Financial Planning, Retirement Planning

Happy New Year! If you’re anything like me or thousands of other typical Americans, you’ve resolved to get your life more organized this year. Now that could mean anything – from closets to paperwork, to anything in between. But how about Beneficiaries? You know, the people that stand to inherit your assets when you die? Do you remember who they are, and whether they’re up-to-date? Many people establish retirement accounts or life insurance policies, and then, except for watching the numbers grow, basically forget about them. But a lot can happen over time…divorces, births, deaths, changes in relationships…but your beneficiaries don’t get updated until you do something about it. And that could be a big problem when the time comes for your assets to be passed on.

I strive each year to sit down with my clients face-to-face to talk about their investments. I also make it a point to cover the discussion of Beneficiaries and “The Beneficiary Form.” Although it can be easily overlooked, it is a critical part of the investment process.
A question that often comes up is, in the case of beneficiary designations versus your will – who wins? It is my experience that an increasing number of financial products offer the option of naming beneficiaries. The benefit of this is that when the owner dies, the assets go directly to the beneficiaries named on the accounts, bypassing the sometimes long and costly probate process. On the flip side, however, this beneficiary designation overrides any designations indicated on your will, making it crucially important to carefully coordinate these beneficiaries with your estate plan.

For older accounts that may have been opened years ago, it is not uncommon for account holders to forget who they named as their beneficiaries when they established the account. In some cases, if this information is not up to date, it can cause serious problems for those left behind: a family member can become disinherited, or it can even result in a disabled child losing government benefits – even if your will has indicated these designations correctly!

So how do you properly designate beneficiaries? When considering your beneficiary designations, it is important to first know where to look. Common accounts that allow you to designate a beneficiary are bank accounts, certificates of deposit, and retirement accounts. Payable on Death, or POD designations for stocks, bonds, and mutual funds accounts can include a Transfer on Death, or TOD registration. Another investment vehicle in which a beneficiary is listed is your life insurance policy. As a starting point, make sure you identify who is listed as your beneficiary for all of these accounts as you seek to coordinate this information for the best benefit to those you may leave behind.

One important caveat, however, is minors. When it comes to designating minors – usually children under 18 or 21 depending on the state in which you live – we generally recommend that they not be named as beneficiaries. If a minor becomes a receiving beneficiary, a court may oversee the account, resulting in unneeded expenses and burdensome reporting requirements. Instead of naming minors as beneficiaries, establish a trust for the minor child, naming the trust as the beneficiary. This allows the funds to be easily accessible for the children at the proper age without excessive legal overhead. Of course, check first with your individual state laws, and also make sure you see an estate planning professional to discuss this in more detail.

Properly designating beneficiaries can also lead to reduced tax implications, specifically when dealing with a retirement plan such as a 401(k) or a 403(b). By naming a family member the beneficiary rather than the “estate,” distributions may be delayed or stretched out, resulting in lower income taxes, as opposed to one large taxable distribution at a high income tax bracket.

The important thing to remember is to make it clear. Just as we do with each of our clients annually, take the time to review the beneficiary for each of your accounts. We find that in this era where financial institutions are constantly changing hands through mergers and acquisitions, it is important to ensure your records stay straight. Check your beneficiary forms today. Make sure you have designated the right individuals or trusts to guarantee the maximum long-term benefits. Then, make it a point to review these designations annually and adjust as needed. This will give you peace of mind, and help you ensure that those you want to receive your money will actually receive it.

Remember that we are always here to help you navigate the complex world of investments and long-term financial planning. Please feel free to share your thoughts on this subject, and may this reminder help you kick off a successful, prosperous, and organized 2015!

Robert W. Tull, Jr. is founder and president of Tull Financial Group, and a CERTIFIED FINANCIAL PLANNER™ professional in Chesapeake, Virginia. With more than 30 years of financial planning experience in Hampton Roads and beyond, he focuses on the areas of investment management, and retirement and estate planning. He also provides highly individualized personal and business advisory services.

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