Don’t allow the money that you’ve saved over your lifetime to go to the IRS, your ex-spouse or a distant cousin you haven't seen in years. It is important to review the beneficiaries for your retirement accounts and life insurance policies. Those people you designate as beneficiaries will get the proceeds directly at your death, regardless what your will says about it.
The Chicago Tribune gives us five things to know about naming beneficiaries on retirement plans and insurance policies in “Who will get your money when you're gone? Some things to know.”
You can have a “do-over.” The owner of an account or policy can change the beneficiary any time they want by contacting the plan administrator or life insurance company. To be safe, name a contingent beneficiary as a second, in the event that your named beneficiary has died.
Taxes. The tax implications for beneficiaries vary. Life insurance proceeds are received by the beneficiary without tax liability after he or she submits proof of death, but the death benefit will be counted for potential estate taxation depending on the overall value of your estate. The money received by an IRA beneficiary is subject to a number of options, like a rollover, based on whether the beneficiary is the spouse or someone else. These choices can affect the taxes to be paid when money is withdrawn from the retirement account.
Friends are OK. The beneficiary doesn’t have to be a relative. You could select a friend or a charity. However, if you name an individual as beneficiary of a retirement plan, it’s important tax-wise that the beneficiary understands NOT to make an immediate withdrawal from a retirement plan. Depending on the age of the person who died, and whether or not the beneficiary is a spouse, there are several decisions about rolling the account into another IRA that should be made to keep the money growing tax-deferred or tax-free in a Roth. Each decision will have distinct tax and withdrawal implications for the beneficiary.
No kiddies! Don’t name a minor as a beneficiary of a life insurance policy or a retirement account, because it will usually result in a court-ordered trustee being appointed. He or she would have the authority to make distributions, which might not be what you wanted. If you want your young children to be beneficiaries, talk to an experienced estate planning attorney and create a trust as beneficiary. You can designate the trustee of your choice and include payout instructions.
Surprise! It's totally your decision whether to tell your beneficiary that he or she will receive money at your death. However, if you designate an institution or charity as the beneficiary, you need to obtain the proper forms and instructions to do this correctly.
No one likes to think about death and beneficiaries, but make sure you have all your forms updated to reflect your intentions.
Reference: Chicago Tribune (January 6, 2017) “Who will get your money when you're gone? Some things to know”