It’s 2016: Do you know who your beneficiaries are?

Q: My partner and I just got married and created new wills and other estate documents. We’re not sure who we listed as beneficiaries on our old life insurance and retirement plans. Does having new wills automatically update those old policies/plans?


A: The quick answer is no! Life insurance and retirement-plan beneficiary designations will bypass your will. It’s very important for you to contact those companies right away to make sure the named beneficiaries are appropriate for your plans. Here are some tips for you and others who may be in a similar situation.

Whether you’re wealthy or earn a modest income, there is one estate-planning concern that is shared by people from all walks of life: the decision of who gets what when you’re gone. While some individuals logically assume that a will is the only official forum to express such decisions, that is not always the case. Often, an equally important issue in estate planning is whom to name as beneficiary on life-insurance policies and retirement-plan accounts such as 401(k)s and IRAs, since these assets are passed on regardless of what may be spelled out in a will.

Naming beneficiaries can be complicated and could present unintended consequences to the beneficiary. For instance, an improper designation could make life difficult for your family in the event of your untimely death by putting assets out of reach of those you had hoped to provide for, possibly even increasing their tax burdens. Further, if you have switched jobs, become a new parent, divorced, married or survived a spouse or child, your current beneficiary designations may need to be updated.

If a financial review is part of your annual ritual this time of year, be sure to include a beneficiary review as part of that process. Here are a few general pointers to keep in mind when naming beneficiaries, followed by some specific guidelines for insurance policies, employer-sponsored retirement plans and IRAs.

General considerations

• Age of beneficiary. Many policies and plans will not directly transfer assets to minors until a trustee or guardian is approved by a court.

• Ability of beneficiary to manage assets. Perhaps a trust set up in the person’s name would be better than a direct transfer.

• Naming contingent beneficiaries. Should something happen to your primary beneficiary, the contingent beneficiary would receive your assets. Charities may be a consideration for contingent beneficiaries for those without other heirs. 

Life insurance 

No matter who is designated, the beneficiaries will receive the death-benefit proceeds income-tax free. Unlike property disposed of in a will, if the beneficiary designation form is properly completed, insurance proceeds do not go through probate.

For many married couples/partners, a spouse will be the most logical beneficiary. A trust may be a prudent beneficiary choice, however, if a surviving spouse would not have the ability to effectively manage a large sum of money. The trustees (often a legal entity rather than an individual) would then take charge of managing, investing and disbursing the policy proceeds for the benefit of the surviving spouse/partner.

Be sure to name contingent or secondary beneficiaries. This means that if the primary beneficiary has died, the insurance proceeds would go to the secondary individual or trust. If there are no surviving beneficiaries, then your beneficiary is generally the “estate of the insured,” which means the death benefits end up being probated and ultimately distributed according to the instructions of the decedent’s last will and testament. If an individual dies without a valid will (intestate), then the order of legal beneficiaries to whom assets are distributed is specified by that state’s law.

Retirement plans and IRAs

Federal law generally requires that a spouse be the primary beneficiary of a 401(k) or a profit-sharing plan account unless he/she waives that right in writing. A waiver may make sense in a second marriage — for example, if a new spouse is already financially set or if children from a first marriage are more likely to need the money.

Single people can name whomever they wish as beneficiary of a retirement account, and non-spouse beneficiaries are now eligible for a tax-free transfer to an IRA.

The IRS has also issued regulations that dramatically simplify the way certain distributions affect IRA owners and their beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.

Keep your plan up to date 

When completing overall estate plans and wills, it is imperative to readjust all beneficiary designations so that your estate plan accurately reflects your intentions. Remember, outdated beneficiary designations (e.g., older parents or ex-partners or ex-spouses) could misdirect the intended flow of an entire estate plan unless changed now. 

Also keep in mind that beneficiaries are paid directly as named. Thus, beneficiary designations are not governed by the directions of last wills and testaments.

As is always the case with estate planning, consult with qualified professionals concerning your particular situation in order to ensure that your beneficiary designations are in tune with your goals.

Tax tips

• Life-insurance benefits are transferred free of income taxes.

• A non-spouse beneficiary of a pension plan, such as a 401(k), must report the proceeds as “income with respect to a decedent” but can transfer assets tax free to an IRA.

• IRA beneficiaries must pay income taxes up to the fully deductible portion of the IRA proceeds and earnings. A spousal beneficiary may be able to treat the IRA as his or her own IRA.

Jeremy R. Gussick is a CERTIFIED FINANCIAL PLANNER™ professional with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial-planning needs of the LGBT community and was recently named a 2015 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including the DVLF and the Independence Business Alliance, the Philadelphia region’s LGBT chamber of commerce. OutMoney appears monthly. If you have a question for Jeremy, email him at [email protected] LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

*As reported by Financial Planning magazine, 1996-2015, based on total revenues.

**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers.

This article was prepared with the assistance of Wealth Management Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.