The Power of Proper Beneficiary Designations
There is a public perception that your Last Will and Testament controls who receives their assets at death. However, “non-probate assets” including accounts with beneficiary designations (such as IRAs, 401(k)s, annuities and life insurance) are not controlled by the Last Will and Testament; rather, the beneficiary designation on the accounts will control who is entitled to receive the accounts at death. Keeping these beneficiary designations current is one of the most effective means of ensuring your estate plan is structured as you intend.
Key Benefits of Beneficiary Designations
- Avoid Probate: Assets with a beneficiary designation are not included pass outside of probate, and therefore, reduces costs, fees, and time associated with the transfer of the asset.
- Faster Distribution: With a named beneficiary, funds can be released in a matter of weeks, while probate can delay distributions for six months or more.
- Flexibility: You can easily update designations to reflect changes in family, marriage, or life circumstances.
- Income Tax Implications/Distribution Rules: For taxable accounts, such as IRAs and 401(k)s and annuities, designating a “qualified eligible beneficiary” allows for a extended distribution schedule, which can maximize income tax efficiency to the beneficiary.
- Privacy: Beneficiary designations, unlike a bequest through your Last Will and Testament, are not public record and therefore, you are able to maintain privacy regarding your accounts.
Risks of No Designation of a Beneficiary
- Probate Delays: Assets default to your estate and become subject to probate.
- Tax Complications: Possible tax consequences if distributions aren’t handled promptly or correctly, including higher income taxes to beneficiaries.
- Unintended Recipients: Failure to designate beneficiaries may cause assets to go to whom you did not intend to receive the asset.
An annual review of your beneficiary designations can ensure your assets reach the right people, at the right time, with minimal cost and complication. If you would like to consult with an estate planning attorney regarding your estate plan and beneficiary designations, please contact our firm.