Money Tree

By Isabelle Wiemero

Just as it is important to be sure that you are allocated appropriately given market conditions and your risk tolerance, you need to know how your money will be passed to your heirs and that it is aligned with the rest of your estate plans.

As a rule of thumb, investors should at the very least review their beneficiary designation whenever they experience a life-changing event. For example, you get married, you have a child or a loved one passes away.

What is unique about your retirement accounts – such as IRAs, 401(k)s, 403(b)s – is that the money in these accounts passes directly to your designated beneficiaries on each account, regardless of what your will says.

Given the impact of this decision, naming beneficiaries can be very stressful for investors. Here is some insight to make the decision less complicated.

Spousal Beneficiaries

In community property states – including Wisconsin – if you do not name your spouse as your sole primary beneficiary, your spouse is required to sign off in order for your designation to be accepted.

The major advantage to naming your spouse as your sole primary beneficiary is your spouse may simply roll over your IRA into their own account and keep it intact. That way, your spouse will not have to deal with any required distribution rules that non-spousal beneficiaries have when they inherit a retirement account.

Using a Trust

Trusts serve as an excellent tool for making sure your accounts are used in the way you intended. A common use for trusts is providing for minor children or grandchildren. Trusts may also be useful for heirs with special needs, financially irresponsible heirs and second marriage issues.

If you are considering creating a trust, it is important to discuss it with your estate-planning attorney so that you create a trust that best fits your personal needs.

Contingent Beneficiaries

What happens if your primary beneficiary dies before you? Well, if you had not updated your beneficiary designation in a while, the next in line would be your contingent (secondary) beneficiaries.

A common instance when your contingent beneficiary should be updated is when you have named your children as contingent beneficiaries and any of them have married and have a new last name.

Per Stirpes

Per stirpes is a Latin term meaning “by the branch.” Adding this feature to a beneficiary designation can be a great way of making sure money passes the way you had planned. Let’s say, for example, you have three children, and you had named each child equally as primary beneficiaries per stirpes. With this designation, if one of your three children had died before you, that child’s children would receive the child’s one-third portion of your account “by the branch.”

In this same situation, if you did not have the per stirpes designation and one of your children had died before you, that child’s family would be left out of the equation, and your other two children would split your account between the two of them.

Charitably Inclined Investors

If you are charitably inclined, you may want to consider naming a charity as the sole or partial beneficiary of your accounts. Generally, when you give money to a charity, even from a retirement account, the money is not taxable. If you are considering naming a charity as a beneficiary on one or more of your accounts, you may consider naming the charity as the beneficiary of a Traditional IRA and naming your loved ones as beneficiaries on your more tax-friendly accounts, for example a Roth IRA. If you are considering this, you should discuss your specific tax situation with your tax preparer.

Transfer on Death Accounts

So you are all set with your retirement accounts, but what about your nonqualified investment accounts? If you have a nonqualified individual or joint account, you do have the option of giving them a “Transfer on Death” (TOD) registration. Similar to your retirement account designations, with a TOD registration you can name primary and contingent beneficiaries, which will allow for those assets to avoid passing by way of your will and thus avoid going through probate.

Isabelle Wiemero is an investment advisor at Landaas & Company.

(initially posted Aug. 15, 2013, updated Jan. 2017)

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