Big Decision: Choose Beneficiaries Wisely

Scott J. Kleiman

Physician's Money Digest, June15 2004, Volume 11, Issue 11

A critical and sometimes overlookedaspect of a comprehensivefinancial plan is naming the beneficiariesof pension plan accounts, IRAs,and insurance policies. Each type ofaccount or contract can present unique taxand legal consequences.

Retirement Accounts

The rules affecting pension plan beneficiaries may vary by employer and by thepayout option the employee selects. Ingeneral, however, tax law requires that aspouse be the primary beneficiary, unlessthey waive that right in writing. Singleaccount holders can name whomeverthey'd like as the beneficiary, however,nonspouse beneficiaries are not allowedto roll the assets into an IRA or other qualifiedretirement plan.

IRAs have more flexible beneficiaryrules—virtually anyone can be named as abeneficiary. If the beneficiary is a survivingspouse, they may treat the departedspouse's IRA as their own, rolling theunused portion into a new IRA, continuingthe tax deferral, and taking annualrequired minimum distributions based ontheir life expectancy.

In general, nonspouse beneficiaries canwithdraw inherited IRA money using theirown life expectancy. When there is morethan one beneficiary, the IRA can be dividedequally into separate IRAs. Beneficiariescould then withdraw money based ontheir life expectancy. Withdrawals for asurviving spouse or nonspouse beneficiarieswill be taxed at then-current rates. Inaddition, early withdrawals prior to age59 1/2 may be subject to a 10% penalty tax.

Insurance Policies

Regardless of who may be named beneficiaryof an insurance policy, they willreceive the death benefit proceeds incometax–free. In some instances, particularlywhen there are certain estate planninggoals, a trust may be a better beneficiarychoice. Depending on your goals, a trustcan be managed by you, your spouse, a relative,a trusted advisor, or a legal entity.Also, in many cases, cotrustees are namedto provide greater flexibility and decision-makingcontinuity.

When naming beneficiaries to insurancepolicies, be sure to indicate secondary,or contingent, beneficiaries aswell. Unnamed beneficiaries are typicallyassumed to be the "estate of the insured,"which means the death benefits must passthrough probate and are ultimately distributedaccording to the decedent's will.If an individual dies without a will, thenthe appropriate state law specifies theorder of legal beneficiaries to whom assetsare distributed.

Generally, pension plans, IRAs, and insurancepolicies will not pay death benefitsdirectly to minors. Instead, a child's guardianwill eventually receive the proceeds onthe minor's behalf. The key here is "eventually."To make the process of receiving proceedsa smooth one, consider naming achild's guardian or a trust (set up for thebenefit of your children) as the beneficiary.

Revisit your beneficiary designationseach year as part of your overall financialreview. Any changes to your life may besignificant enough to affect your choice ofbeneficiaries. Finally, be aware that theremay be tax or legal consequences associatedwith naming certain beneficiaries.

Scott J. Kleiman is the presidentof Apollonia Financial Services inElkins Park, Pa. All securitiesoffered through Linsco/PrivateLedger, member SIPC. Past performanceis no guarantee of futureresults. The information presented is the opinionof Scott J. Kleiman and not Linsco/Private Ledger.Mr. Kleiman welcomes questions or comments at800-242-1760 or info@apolloniafs.com. This articleis not intended to provide specific advice or recommendationsfor any individual. Consult withyour financial advisor if you have questions.