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7 Things You Must Know About Designating Beneficiaries by Greg Hammond

March 17, 2014 0 comments Finances, Financial Freedom
Photo Credit: Mother and daughet by Adam - Treasured Moments Photography
Photo Credit: Mother and daughet by Adam – Treasured Moments Photography

7 Things You Must Know About Designating Beneficiaries

When it comes to estate planning, reviewing your beneficiaries periodically is extremely important.  Even if you’ve recently met with an attorney to review your will, or completed a revocable living trust and have a big binder with all of the detailed documents, it’s important to review your beneficiary forms.  No matter what kind of estate planning you’ve done, the only document that matters to the custodian of your IRA, 401(k) or other retirement account is the beneficiary designation form.

1) Your will or trust or any other legal document will not supersede the beneficiary designation form.  Illustrated by a story in the New York Times titled “Pension Pickle,” the article is about Bruce and Anne Friedman.  The Friedmans were happily married for nearly twenty years when Anne, a former city school principal, died suddenly of a massive heart attack in September 2001.  At the time of her death, Anne had saved into a retirement account with the New York Teachers Retirement System.  It was worth a little over $900,000.  After morning the loss of his wife, Mr. Friedman thought that he would receive the retirement funds.  However, officials at the Teacher Retirement System could only find one beneficiary designation form that was filled out 27 years ago, four years before the couple met.  It indicated that Anne’s mother, uncle and sister were to receive her retirement funds.  Since Anne’s mother and uncle had predeceased her, the entire account went to Anne’s sister.  Her husband for over twenty years was left without a single cent.  The sister would not give him anything.

Not only his sister-in-law prevented him from receiving anything, Bruce went to challenge the beneficiary designation in court.  Both a Manhattan Supreme Court and the Appellate Division upheld decisions that the law states that the beneficiary designation form is binding and no assumption can be made as to an individual’s intention.  Therefore it is important to review your beneficiary designations and make sure that your spouse and family receive the accounts that you would like them to receive.

It is also important to make sure your forms are updated after a life event, such as a death of a loved one or a divorce.  Even if you update your will to exclude an ex-spouse, they can still receive your life insurance, annuity proceeds or retirement account if you have not updated your beneficiary forms.

Since these forms are important in designating who will receive your life insurance or investments, we recommend you keep a copy of the most recent forms with your important legal, estate planning documents to allow you to readily review your beneficiaries from time to time.

2) You can and should, name contingent or secondary beneficiaries.  Beneficiary forms give you the option of adding a contingent or secondary beneficiary.  A contingent beneficiary is important because if your primary beneficiary predeceases you, you automatically have a second beneficiary or beneficiaries in place to receive your insurance or investments.  It is also important to name a contingent beneficiary on your accounts is for estate planning purposes.  Having a secondary beneficiary named gives the primary beneficiary the opportunity to disclaim the account or insurance and have the funds pass directly to the contingent beneficiary.

3) We do not recommend naming your estate as an IRA beneficiary. By doing so, you put the will back into the driver seat as to who will receive the funds; however, the heirs would need to withdrawal the funds out of the account within 5 years.  Depending on the size of your retirement account(s), this could trigger a huge amount of income taxes, especially if the distributions, which are taxed as ordinary income, push your beneficiaries into higher tax brackets. 30% – 40% of your retirement funds could be paid out immediately for federal and state income taxes and that doesn’t include any estate taxes that could be due.

By naming a person as a beneficiary, you allow that individual to maintain the tax deferral of the account.  A spouse can transfer the retirement account into their own IRA or 401(k) and a non-spouse beneficiary can transfer the account to an inherited-IRA.  The non-spouse beneficiary can not combine the funds with their own IRA like a spouse can, but can continue the tax deferral while only taking a required minimum distribution each year.  If the beneficiary does this and “stretches” the IRA, the total amount paid out to them over their lifetime could be substantially more than the amount originally left to them.  In addition, they could potentially stretch out the retirement funds and pass a balance on to another generation beyond them.

4) Be careful when naming a minor (a child under the age of 18) as a beneficiary on your insurance and investment accounts.  If a minor is a beneficiary, typically the investment custodian will require proof of guardianship of the minor from the probate court.  This could potentially be a slow and costly process.  In addition, the guardian will be required to provide triennial accountings to the probate court as to the use and distribution of the funds for the support of the minor.  In some cases you may want to create a trust for the benefit of younger children.  The trust will give you more control over who will serve as the Trustee and you can create various restrictions on the distribution of funds, for example the child may not receive funds until they graduate college or reach age 25.

5) There are advantages to naming a spouse as a beneficiary over a child.
A spouse can rollover a retirement account into their own, deferring distributions from the account until they are age 70½.  If your child or non-spouse beneficiary inherits a retirement account, they will be required to start taking minimum distributions the year after your death.

6) Updating the beneficiaries on your insurance policies and retirement accounts is easy. Many firms offer their beneficiary designation forms online or you can call the company to request one.  You will need your beneficiaries name, date of birth, address and sometimes their social security number.  Be sure to keep a copy of the form and request written confirmation that the beneficiary information has been updated on your policy or account.  Keep these copies and confirmations with the rest of your estate planning documents.

7) Including a charity in your beneficiary designations is an easy way to leave a lasting legacy with a non-profit organization or cause you care about.  Many people fail to do so because of the expense or finality of including an organization in the will.  Why not start by including an organization in your beneficiary designation for a retirement account?  It is an easy, low cost way of making a difference in the world.

We refer to the process of including a non-profit on your beneficiary form the “IRS IRA Gift Matching Program.”  As you look at your IRA or retirement account balance you need to realize that it is not all yours.  Uncle Sam will receive part of your retirement funds in income taxes when they are paid out to you or your beneficiaries.  By designating a non-profit organization for part or all of your taxable retirement account, they will receive 100% of the funds designated for them, thus the IRS is matching your gift with what your beneficiaries would have paid in income taxes.

Everyone with a retirement account can do this. You might consider starting with a designation of $1,000 or $10,000.  If you decide later in life that you can afford to leave more, it is very easy to update your beneficiary designation form.  This allows you to plan for what you feel that you can afford now and make adjustments in the future.

If you are comfortable and definite about your inclusion of an organization in your estate planning, we also suggest that you notify the organization of your intentions to include them in your beneficiary designations.  This allows the organization to note your gift and make sure that they receive it after your passing.  In addition, they may have a legacy society or some other donor group that you can now be included in with your beneficiary designation.


Greg Hammond, CFP®, CPA is a wealth impact strategist who works with individuals, families, closelyheld and familyowned businesses, helping them grow and preserve wealth, plan  for retirement and  manage their charitable giving. He may be reached at 1-800-416-1655 or info@planning4tomorrow.com .

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Greg Hammond
Greg Hammond is passionate about helping people make a greater impact in their lives, their families, and in their communities. Using his remarkable range of experience, Greg helps individuals establish what’s most important, then set and pursue goals toward preserving and growing their wealth. He believes everyone should have a chance to “do and achieve what matters most.” As a wealth advisor, Greg has counseled hundreds of individuals, families, and business owners on developing strategies for investments, intergenerational wealth transfer, building a legacy, reducing taxes, protecting the value of their estates, and charitable planning. A sought-after charitable giving and financial educator, consultant and speaker, Greg has been in financial management for more than 20 years. He is frequently interviewed by the media; recently by the Wall Street Journal for “Earning Income While Making a Gift” and the Hartford Business Journal Nonprofit Notebook for “Planned Giving.” Greg co-hosted the radio show, “Planning for Tomorrow” on WTIC News Talk 1080AM covering topics such as creating lifetime income, charitable use of life insurance, and philanthropic planning. He has been interviewed on WTIC AM news, published a special report on nonprofit challenges, and regularly speaks on “Building a Legacy” at national and regional conferences, estate planning councils, religious and nonprofit organizations. A graduate of Miami University, Oxford, Ohio with a B.A. in Accounting, Greg is a CERTIFIED FINANCIAL PLANNER™ Professional and Certified Public Accountant. Greg is also a certified True Wealth Consultant, a member of the Partnership for Philanthropic Planning (PPP), The Planned Giving Group of Connecticut (PGGCT), The Financial Planning Association (FPA), Association of Fundraising Professionals (AFP), The American Institute of Certified Public Accountants (AICPA) and the International Association of Advisors in Philanthropy (AiP). Greg’s commitment to making a difference has guided him to participate in Habitat for Humanity and to lead groups on mission trips in the United States and Mexico. Greg contributes to his local community as a board member for PGGCT, Treasurer for Westminster Presbyterian Church and Advisory Board member for The Connecticut Forum. Greg and his business partner, Scott Iles, sponsor many annual fundraising events for nonprofit organizations including a golf tournament to benefit ALS and fundraising for the Connecticut Children’s Medical Center. A published author, Greg lives in West Hartford, CT with his wife Karen and their two daughters. Greg enjoys research and writing, tennis and a challenging game of golf when he is not at the office or enjoying time with his family.

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