Beneficiaries: Who gets your assets?

Making sure your hard-earned assets go to the right people

You’ve worked hard to create a good life for your family. But if you died tomorrow, who would inherit the spoils of your success? When you draw up a will, you can be very specific about who gets what — except when it comes to retirement accounts, life insurance and certain other financial accounts. So it’s important to name a beneficiary across all your investments and life insurance policies and to periodically review your beneficiary choices.

Why you should designate your beneficiaries.

Let’s say you have $100,000 in your 401(k) and a $1 million life insurance policy. You’ll want to make sure those assets go to the right people when you die. If you name your beneficiaries, they’ll likely get them directly without having to deal with the courts. If you leave the beneficiary form blank, your assets may be divided through the probate process. The probate process differs from state to state — but wherever you live, chances are that a complete stranger will determine who gets your assets. In some cases, they’ll be divided equally among all living relatives. Yes, that includes ex-spouses.

The best choices.

It’s equally important to think about who your beneficiaries are across your entire portfolio. You won’t want to skip this step because, in most cases, beneficiary designations trump whatever’s in your will.

If you’re married, your spouse is probably going to be your primary beneficiary. For example, employer-sponsored retirement plans generally require you to get written permission to name someone other than your spouse. A spousal beneficiary means you have a lot of flexibility in how your assets are distributed. Three options are:

  • Roll over the balance to an IRA or another retirement plan – This keeps the money in a tax-deferred account in the beneficiary’s own name.
  • Leave the money in the original plan account – If the beneficiary does not immediately need the money, this “take-no-action” option is one of the simplest approaches.
  • Take the money in cash – This option works if the money is needed for immediate expenses, but income taxes will be due, and they lose out on the future earning potential of those investments.

If you’re single, you can name anyone as your beneficiary. Young people with modest assets sometimes name their parents. But as your net worth grows and your parents age, be aware that an inheritance from you might create tax issues for them.

A mistake that parents often make is to name minor children as beneficiaries without appointing guardians. The rules vary by state, but unless you’ve named legal guardians for your children through a trust, the courts could decide when and how your kids receive the money.

It can also be a good idea to name contingent beneficiaries — one or more people who could receive your assets if your primary beneficiary dies or is incapacitated.

Dot the “i”s and cross the “t”s. Then do it again.

So you’ve put a lot of thought into your will and your beneficiaries. Make sure you stay in control of who inherits your assets by updating your beneficiary designations whenever something happens in your life — such as a marriage, the birth of a child, a divorce or the death of a spouse. These aren’t decisions you’ll make lightly. Work with your financial professional to help you through these many decisions.

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This material is intended for general and educational purposes only; it is not intended to provide legal, tax or investment advice. We recommend that you consult an independent legal advisor or financial professional for specific advice about your individual situation.

The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.