Beneficiary Forms

Most of your retirement accounts will have a beneficiary designation on them where you can designate where you want your assets to go when you are now peacefully resting. They can be your best ally or your worst nightmare. It is a simple form that most, as a pre-retiree or retiree, overlook because it is something you may have filled out 20 or 30 years ago, or maybe even not at all. If it isn’t filled out correctly, or in the way you want it to go when you pass away, that is where it may cause some problems in the future. Here is why you need to re-visit at your beneficiary forms as a Baby Boomer in or near retirement.

Avoid Probate

One of the best advantages to a beneficiary form is that it will avoid probate. Usually, a one or two-page form that is simple to fill out will dictate where most of your money will go. Especially if most of your money is in a 401k, IRA, 403b, TSP, Roth IRA, or any other type of retirement account. In a matter of minutes, you can fill out the form and dictate where you want your assets to go when you pass away.

Inherited IRA advantages

If a beneficiary of an IRA is about to inherit a large sum from your retirement account, they may want to think twice about taking it as a lump sum. If they do, since an IRA is an account that has yet to be taxed, they must pay ordinary income taxes on the whole amount if they recognize the amount in a single lump sum. The way to avoid this is for the beneficiary (non-spouse individual) of the IRA, or retirement account, convert it to an inherited IRA. The non-spouse individual can receive your assets and turn it into an inherited IRA (sometimes also known as a stretch IRA or a beneficial IRA). The inherited IRA allows the beneficiary to stretch out distributions for the rest of their life based on the IRS table of required minimum distributions. The table tells you how much you must take out each year without receiving 50% penalty. That way they won’t jump up in multiple tax brackets and only take out a small percentage of the assets and can let the rest continue to grow. If your spouse is the primary beneficiary, he or she may be able to take over a deceased account without having to convert it to an inherited IRA.

What happens if you don’t fill out the beneficiary form?

The good news is the assets will still go to your estate. The bad news is that it will go through probate and your beneficiaries can’t do an inherited IRA where they can distribute the assets over their life expectancy. The IRA can be converted to an Inherited IRA where it must be taken out over a five-year period now. If they must take it out over five years, it isn’t the end of the world. However, there is a chance that it still isn’t the most efficient way of distributing the assets tax efficiently. Something that only takes a couple of minutes for you to fill out can cause months and years’ worth of problems. Now I am sure when you are no longer here; you want to leave your money that you worked hard for to your loved ones in the most efficient and hassle free manner.

If you have a beneficiary form already filled out, make sure they are updated. Since there are a great deal Baby Boomers retiring or reaching retirement age, the Supreme Court has ruled on many different lawsuits in regards to beneficiary forms and the way to enforce them. What they ruled every time, even for how old and over many different types of beneficiary forms, is that the beneficiary form will dictate where your assets will go, not your Will or any other document, like a divorce decree. If you haven’t updated them since a divorce or since you first started working, your assets may not be going to the person or place you would hope it would go to. Unfortunately, there is nothing you can do when you are no longer here. The court system made it easy for you, the beneficiary form is what matters most and will go to whomever you labeled on the form, no matter how recent or old the form is. Make sure you update them so that your assets don’t go to the unintended person and create controversy when you are no longer here.

Create Less Controversy

Because your beneficiary form supersedes your will, it may be a good idea to either match up your will with your beneficiary form to create less controversy. A lot of times the Will may dictate differently than your beneficiary form, which could create questions as far as whether you knew what you were doing when filling out the beneficiary form. Because the Supreme Court says that the beneficiary form supersedes the Will and not the other way around, you should either help your family understand what your intentions are so that they do not question the way you had it split. Otherwise, there could be some fighting between your family based on what the Will says and what your beneficiary form says. The hope is that your family can still sit together at the Thanksgiving table when you are no longer here.

What other documents have beneficiary forms?

Check your life insurance policies and annuities as they also have beneficiary forms. Not just your personal life insurance and annuities, but also the ones that are held by your employer. You may be surprised as far as when it was last updated or whether you left it blank.

What else can you overlook?

Some will put a beneficiary on the form, but leave the contingent beneficiary off the form because you can’t think of anyone or you don’t take the extra time to figure out the way you want your assets to go if you and the primary beneficiary go first. Most of the time, you typically name your spouse as the primary beneficiary if you are married, but often do not go beyond that. What happens if you both pass away at the same time? Although contingent beneficiaries may be second in line, it is important also to have them on the form so that they can also take advantages of the benefits and be efficient with taxation.

Do you still need a Will if you have a beneficiary form?

A Will is always recommended, even if most of your assets are covered by a beneficiary form. You may have already experienced an estate where the family was fighting even over the simplest things. As I said earlier, it may be best to make sure your Will be in line with your beneficiary form or is stated somewhere that you made the decision on the Will and your beneficiary form different on purpose to avoid conflict when you are no longer here.

Your beneficiary form could be the most important estate document that you may overlook. There are a lot of advantages for filling it out and making sure it is updated. By not filling it out or forgetting to update it may cause a nightmare for your estate when you are no longer here. As a Baby Boomer in or near retirement, or even if you are 10, 20 years out from retirement, it is a good idea to make sure you put beneficiary designation on your 401k, IRA, 403b, TSP, Roth IRA, or even your life insurance policies or annuities and frequently review them to make sure your assets are going to go where you intend them to go. It is a simple form that can be overlooked, but it is worth its weight in gold when you are resting peacefully. If you don’t know where to find them or update them, talk to your employer plan administrator or your financial advisor, and they should be able to help you.

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Video Transcription

Hi, Vince Oldre, here again to talk to you about beneficiary forms. Now, beneficiary forms are rather simple forms for you to fill out. However, if you do not fill them out, they can create quite a mess in your retirement, more so when you’re not here than when you are here. I’ll give you a couple of examples as we talk through this video together, but one of the things that I noticed when it comes to beneficiary forms is that they’re not looked at as that important and they are very, very important, especially when it comes to estate planning.
One of the nice things with beneficiary forms is they will supersede your will, but that could be also a negative. If you do not have your will lining up with your beneficiary form, people in your family might say, “Well mom/dad wanted to leave us the money because that’s what the will had,” or they might say, “Well that’s what the beneficiary said,” but at the end of the day, whoever the beneficiary form says, that’s where the money will go. So if you want to make sure your family will still talk at the dinner table, make sure you have your will and your beneficiary forms lining up together. Make sure that they say the same thing.
Now secondly, if you do not name a beneficiary on your retirement accounts, you can also make another big mistake. One of those is that if your beneficiaries want to take an inherited IRA or a beneficial IRA, they can do so as long as you label them as the beneficiary. If you do not and you let the estate take over as the beneficiary, whoever is the beneficiary of the estate will have to take out those proceeds over a five year period instead of taking out over now their lifetime. So you could actually be hurting your family tax wise by not labeling beneficiaries on your forms.
One of the great things with beneficiary forms is that they do supersede the will, so keep in mind that you have to keep track of your beneficiaries. If things change, make sure you’re changing those beneficiaries because it doesn’t matter what the will says. If you pass away and whatever that name is on that beneficiary form, that’s where that money’s going to go so make sure you’re updating your beneficiary forms on your IRAs, 401Ks, 403Bs, any type of retirement account that has a beneficiary form.
Last but not least, some people use transfer on death or TODs. Those also will supersede your will so you want to make sure you have those updated as well. Usually where we see a transfer on death is a brokerage account or bank account. Make sure that those are updated as well and make sure that you know where that money’s going to go if you are no longer here tomorrow. Until then, my name is Vince Oldre. I thank you again for watching.

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