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Naming your beneficiaries

June 22, 2008
Your Money’s Worth, By Steven J. Bailey, CFP, CLU, ChFC
Naming your beneficiaries

When it comes to naming a beneficiary for your IRA’s, life insurance, company retirement plan, annuities, or other assets that you may have, it may seem like a no-brainer. By naming beneficiaries on these assets, you are pretty much saying that upon your death you want those assets to go the person or persons who you named as beneficiaries. Also by naming beneficiaries on these assets, they will pass directly to whomever you designate and those assets will not have to go through probate. By avoiding probate you will essentially shorten the time it takes for your beneficiaries to receive those assets and you will also avoid the costs associated with probate.

The first step in naming your beneficiaries is to decide whom you want your assets to go to upon your death. This may be your spouse, your children, other relatives, friends, charities or any combination of these. When making these decisions you should remember that your beneficiary designations will override devisees that you have named in your will. For example, your will might state that all of your assets go to your spouse whereas your beneficiary designation on your annuity states that half will go to your spouse and half will go to your son. Since the annuity has named beneficiaries, those assets in the annuity will pass directly to your spouse (half) and son (half) and your spouse will not get the full value of the annuity (like your will states).

The second step to keep in mind would be to make sure that you are specific on who you name as beneficiaries. By being specific about the names of your beneficiaries, you should designate exactly whom you want to get your assets and how much of that asset you want them to get. It may seem easier to name one person whom you trust as a beneficiary and tell that person that you would like them to distribute an asset to other people. By doing this you can run into a few different problems. These problems may include: the person you named as beneficiary does not have to distribute the asset to any one else since they were the named beneficiary, that individual may be directly responsible for any taxes or expenses due on the distribution, and they may be responsible for gift taxes if the amount they have to distribute to other people is over the annual exclusion amount ($12,000 per person in 2008).

Another aspect of naming a beneficiary that needs to be addressed is the potential tax consequences. If you name your spouse as the beneficiary of your assets, your spouse may be able to roll the amount in the plan into their name and they will be able to delay the taxes due, whereas if you name someone other than your spouse as the beneficiary they may be responsible for all the taxes due on the distribution. Also by naming someone other than your spouse as beneficiary, the amount of the distribution from the retirement plan will be included in your estate. Although you may not have a spouse to name as a beneficiary, you should do proper estate planning when designating your beneficiaries to try and reduce the tax consequences to the beneficiaries.

The last thing, and probably the most important thing to remember when naming your beneficiaries is to make sure that you review who your beneficiaries are on a regular schedule and make any adjustments due to any major life events like divorce or the birth of children.

Steven J. Bailey CFP®, CLU, ChFC is a registered representative of American Portfolios Financial Services, Inc. Member FINRA/SIPC, Advisory Services offered through American Portfolios Advisors, Inc., located at 992 E. State St. Salem and can be reached at 330-337-7720 or if you should have any further questions regarding this matter.



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