Your beneficiary designations should be checked every time your situation changes because the beneficiary designations trump anything that you state in your Will or Trust.
Married? Divorced? Chances are you either want to add your new spouse, or delete the ex-spouse as your beneficiary. Don’t delay. An ex-spouse can collect your life insurance benefits at your death if he or she is still named as your beneficiary.
Birth of another child? Adoption of a child? If you listed each of your children on the beneficiary designation form, your new-born or adopted child won’t inherit unless you add his or her name. Moreover, if your children are under age 18, they can’t inherit directly. Either a custodian under the Uniform Transfer to Minors’ Act (UTMA), or a conservator, will need to be appointed.
Also be careful to designate whether you want the children of any child of yours who dies before you die to inherit your predeceased child’s portion. Otherwise, only your surviving child may inherit.
Several types of assets allow beneficiary designations – life insurance, retirement plans, health savings accounts, annuities, 529 college accounts, Payable on Death (POD) accounts (bank accounts and certificates of deposit), and Transfer On Death (TOD) accounts (stocks, bonds, mutual funds).
Retirement plans are particularly prone to error. If you are married your spouse must consent before you can designate someone other than your spouse as the primary beneficiary.
Don’t name “my estate” as the beneficiary of a traditional retirement plan because that directive will trigger the payout and taxation of all of your retirement plan assets within five years of your death. The better option is to name individual beneficiaries. Why? Tax regulations allow individuals to “stretch out” the distributions that they are required to take from the retirement plan. This “stretch out” is based on the age of the beneficiary, which means that assets held by a young beneficiary could appreciate in value for many years without incurring tax liability.
An advantage of assets that call for the naming of beneficiaries is that those assets avoid probate.
As a precaution, ask the company responsible for the asset for which you wish to designate a beneficiary to give you written confirmation of the beneficiary designations that they have on file for you. Check these designations for accuracy and correct any errors so as to avoid any future problems that you may not be able to correct.
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