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Beneficiary designation basics

He left all his money to her?!?!

Building assets for retirement may seem like challenge enough, but designating beneficiaries to inherit those assets can bring an entirely new set of considerations into the mix.

While it may seem simple to use the first name that comes to mind (a spouse, a child or a sibling) on the beneficiary designation form, you should know the ramifications first. Here's a guide to what's involved.

Beneficiary Designation Basics

Most retirement plans, annuities, and life insurance policies let you decide what should become of your assets in the event of your demise. They do this by asking you to designate beneficiaries. The primary beneficiary (or beneficiaries) inherit first. If they are dead or if they die with you, your assets would instead go to any secondary beneficiaries you have designated. These secondary beneficiaries are often referred to as contingent beneficiaries on account forms.

To designate beneficiaries, you will need to name names, and you will need to determine what percentage of your assets will go to each beneficiary.

Beneficiaries can include those who first come to mind — spouses, children and other relatives. Alternatively, they can include friends, trusts, charities and institutions.

Be aware that beneficiary designations generally become active immediately after death and override any information regarding inherited assets provided in your will. That means your assets will not have to go through probate, a legal proceeding that can be time consuming and possibly very expensive. But it also means that you need to ensure that your current beneficiary designations reflect your most recent wishes, because your will cannot override them. If your trust is named as a beneficiary then the roadmap you build in your trust will dictate to your trustee how to distribute your assets - but the asset needs to be moved to the trust first. It's a good idea to review your designated beneficiaries with your estate planner every year, for all your accounts to make sure your overall plans are met.

It's also important to update your beneficiary information after any major life change such as marriage, divorce, or the birth of a child.

What to Consider in This Process

Spouses can generally inherit assets from one another without generating estate taxes or, in the case of retirement accounts, being forced into taking mandatory taxable payouts. But remember that if the inheriting spouse has turned 70 1/2, normal retirement account distribution rules apply — check with your estate planning attorney or tax advisor for details, as the rules are complex.

Other heirs, though, may face some consequences.

Loading too many assets on to some heirs may make those heirs' estates liable to pay federal estate tax. Keeping your potential heirs informed of your intentions allows them to plan accordingly.

Many types of tax deferred retirement plans, including 401(k)sand most forms of individual retirement accounts, will force your beneficiaries to take the money now in a lump sum payment and pay income taxes on the full amount, or take required taxable distributions every year in amounts that are based on Internal Revenue Service life expectancy tables. Roth IRAs are exempt because you have already paid taxes on the money in them.

One way to avoid taxes on your inheritance altogether is to designate a charity or a non-profit group, such as a university foundation, as your heir. If you do that, there's no tax on the transfer or on the future use of your money.

Creating a Trust for Minors or Others

Underage children, a group that may include anyone

up to age 21 in New Mexico, cannot directly inherit assets from an annuity, a retirement plan or a life insurance policy. Examples of two types of trusts created for minors or others include a testamentary trust and a revocable living trust. Consult with your estate planning attorney to set up trusts for them. The trust you create then can be named in your beneficiary list.

You may also want to create trusts for beneficiaries with mental disabilities, if they are unable to handle their own affairs. These types of trusts are often referred to as a special needs trust.


There are many important considerations to make when choosing beneficiaries for a retirement account, annuity, or life insurance policy. Make sure you take the time to review your elections carefully to make sure your wishes are up to date and to help your loved ones avoid future headaches. As always, the Foster Legal Advisory Group, PC is available to speak to you or your family members regarding properly making beneficiary designations so that your assets get moved to protect those you love. Call me today!

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