If you have life insurance policies, retirement accounts, or annuities, it’s your responsibility to designate a beneficiary. Naming a beneficiary ensures that your loved one or heir is taken care of in the manner you want.
What Is a Beneficiary
A will isn’t the only document that establishes who will receive your assets once you pass away. Assets are often passed down via a beneficiary designation.
Life insurance and retirement accounts, such as 401(k)s, Roth IRAs, and others, are separate from a will. These accounts require a beneficiary—namely, the individual or entity who will receive the proceeds from these accounts or policies once you die. Further, the beneficiary designation on these accounts usually overrides a will.
Name a Beneficiary, Avoid Probate
Many individuals don’t bother to fill out the paperwork and name a beneficiary, or they neglect to name a contingent beneficiary.
Without a beneficiary, the death benefit from a life insurance policy will go to probate. The result: your heirs will need to go to court to obtain the funds—a time-consuming and often costly process.
A qualified retirement account such as a 401(k) will go to your spouse by default. An IRA or Roth IRA may not include this provision, depending on where you live. In any case, if there is no surviving spouse, and no one else is named as a beneficiary, the account will go to probate—and your heirs will need to go to court to obtain the funds.
Check Your Spelling
A spelling mistake could cause a lot of angst among heirs. Ensure that all beneficiary names are spelled correctly. If there are similar names in a family, not having the correct spelling could cause litigation among your heirs.
Don't forget that people marry, and names change. So make sure you update your beneficiary's name when this happens.
Being able to change your designated beneficiary is important. Naming a revocable beneficiary allows you to change your beneficiary whenever you wish. Most people go this route when naming a beneficiary. Life happens and things change.
A divorce doesn’t automatically change your life insurance or retirement accounts. Having a revocable beneficiary gives you the flexibility to make changes.
An irrevocable beneficiary cannot be changed without the beneficiary’s consent. This is a serious decision that must be carefully thought out. Discuss this option with a financial advisor or attorney before you name an irrevocable beneficiary to an account.
Another mistake is having a primary beneficiary, but not a contingent beneficiary. A contingent beneficiary is someone who will receive benefits if your primary beneficiary passes away before you do.
If your beneficiary dies before you, or is unable to collect your accounts or life insurance—and you have not selected a contingent beneficiary—it falls to the courts to select a beneficiary. You risk death benefits going to your estate, and your heirs could be subject to high taxes. The best practice is to have one or more contingent beneficiaries.
The SECURE Act and Designated Beneficiaries
The Setting Every Community up for Retirement Enhancement (SECURE
) Act of 2019 changed the rules for beneficiaries of retirement accounts. Be aware of these new rules: they may affect who you decide to name as your beneficiary.
A major result of the SECURE Act was a change in who can benefit from the "stretch" provision. This provision allows beneficiaries to "stretch out" distributions from an inherited account—and the associated taxes—based on their own life expectancy. This also allows for continued tax-deferred growth.
Under the SECURE Act, designated beneficiaries may no longer take advantage of the stretch provision. Designated beneficiaries must now deplete inherited accounts within 10 years after the original owner's death. This applies to deceased individuals who die after December 31, 2019.
While adding more restrictive rules for designated beneficiaries, the SECURE Act also added a new type of beneficiary who receives special treatment: the eligible designated beneficiary. An eligible designated beneficiary
has more flexibility when it comes to withdrawing funds from an inherited account and may still take advantage of the stretch provision.
The three groups of beneficiaries are now eligible designated
beneficiaries, and non-designated
beneficiaries. These categories are based on the heir's relationship to the deceased account holder, their age, and their status as an individual or a non-person entity.
Categories of Eligible Designated Beneficiaries
There are five categories of “eligible designated beneficiaries” (EDBs): a surviving spouse, a child under 18, a chronically ill person, a disabled person, and any other individual not more than 10 years younger than the deceased account holder. An eligible designated beneficary is always an individual—it cannot be a non-person entity.
To reiterate, the SECURE Act allows an EDB to take advantage of the stretch provision. This means that the deceased’s retirement accounts can be “stretched" over the expected lifetime of the EDB.
Designated Beneficiaries and the 10-year Rule
Any individual who does not fall within the five categories of the EDB is considered a designated beneficiary.
A designated beneficiary can inherit retirement accounts, but unlike the EDB, a designated beneficiary cannot take advantage of the stretch rule when it comes to disbursements.
Instead, there is a 10-year rule that applies to designated beneficiaries who inherit retirement accounts. The balance of the retirement account must be withdrawn by the end of the 10th year after the account owner's death. Consult your lawyer or financial advisor about required minimum distributions within the 10-year period, as rules governing these continue to change.
A non-designated beneficiary is an estate, a charitable organization, trust, or anything else that doesn’t have a life expectancy (in other words, not a person).
A non-designated beneficiary is also subject to withdrawal rules, depending on the deceased’s age.
Under the 5-year rule, if the deceased died prior to age 72, the non-designated beneficiary must cash out the retirement accounts within five years. The funds must be withdrawn by December 31, five years after the deceased’s death.
But if the deceased died after age 72, the non-designated beneficiary may take out the remaining balance over what would have been the deceased’s life expectancy.
Making a Claim
Whether you are the beneficiary of a life insurance policy or a retirement account, when making a claim, you will need a certified copy of the death certificate. Funeral directors generally provide copies of the death certificate to submit along with claims like this.
Review Your Beneficiaries
Sit down with legal representation or a financial advisor to determine who you will designate as a beneficiary. Then, ensure your wishes are carried out, by updating insurance policies and retirement accounts. Finally, always make sure you have designated a contingent beneficiary, in the event that your primary beneficiary has passed away or is unable to collect.
The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.