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Naming beneficiaries: Communicate clearly

Investors need to designate very clearly who they want to inherit assets they leave behind in investment accounts. Mike Hoelzl explains in an a Money Talk Video interview with Kyle Tetting. The video is part of the virtual 2021 Investment Outlook Seminar. A transcript follows.

Kyle Tetting: Mike, in addition to all the investment decisions that we help clients through, I think a big part of what we do is making sure that accounts, that money goes to the right places, that in the event of death it ends up in the hands that it’s supposed to end up in. Now, as we look at things like beneficiary designations, as an example, there are a lot of critical things for investors to understand as they’re looking at who they might want to name for beneficiaries on their various accounts.

Mike Hoelzl: That’s right. When it comes to estate planning or financial planning with your accounts that you have with us, the biggest thing is that you make who you want the money to go to clear and concise.

It helps us when that time comes to hand the money off, and it also helps you have peace of mind that you know the money is going where it’s supposed to be going.

Kyle: And I think as we look at the clear and concise, it’s one thing to have a very clear understanding of what you want, it’s another to communicate that clearly in the various documents that are necessary to name beneficiaries. And so, while it’s important to have conversations with attorneys about trust planning, estate planning, those kinds of things, I think it’s also important that what you want is what’s properly reflected in those documents.

Mike: A lot of people have outside of their investment accounts, they have trusts and wills and things of that nature. You want all of those goals to align. You want to go over those beneficiaries, just not on the big life events. Everyone has the marriages, the births, the deaths.

You want to touch base with your advisor fairly often to make sure that while your life is constantly changing, those beneficiaries reflect the changes in your life.

Kyle: I think it’s easy to make complex designations. It’s easy to go, “I’ve got this wonderful trust that we’ve spent all this time developing,” but it isn’t necessarily the right way to designate beneficiaries for certain accounts. Sometimes it makes more sense to name someone specifically.

Mike: That’s correct. For your IRAs and your Roth, your retirement accounts, you want to name an actual person because then, when the money gets transferred to them, it keeps its tax-deferred status. If a trust is the primary beneficiary of your retirement accounts, there’s a chance it could lose its tax-deferred status which is the last thing you want to have happen.

Kyle: And of course, we work closely with tax advisors, we work closely with attorneys, to make sure that we understand whether or not that would be the case. But again, I think it can be simpler sometimes just to name an individual. And so that comes down to individual circumstances.

I think also important to remember that because each of these accounts that we’re talking about has potentially different tax treatments, there could be different places you might want those accounts to go.

Mike: Absolutely. Big thing that happens now is like charitable distributions. So because charities don’t have the same tax issues that an individual person has. So a lot of people like to give money from their IRA to charities. With your Roth IRA, because that’s all after-tax money, you can give that to an individual person — a child, grandchild, spouse — and not worry that they’re going to inherit some big tax burden later on.

Kyle: And so I think we talk often about IRAs as the big one that we want to name beneficiaries on, but we don’t have to limit ourselves to just those retirement accounts or those named retirement accounts. There are ways we can add beneficiaries to other accounts as well.

Mike: Sure. It’s called a transfer on death or a TOD and you can, for your retail accounts — and under retail, you have your individual accounts, your joint accounts — and what that does is by, again, clearly naming beneficiaries of those accounts, it helps you avoid probate and any issues after you’re gone.

Kyle: And again, I think stressing the importance that you can put a beneficiary on just about anything, but it’s important for individuals to have a conversation, first and foremost with the people that are helping them make those plans, but then also potentially with the people who might be receiving those assets so they know what to expect.

Mike: Later in life, it helps to bring your beneficiaries into the conversation so they know what’s going on. So they’ve also, I’ve used this word a lot, a very clear plan, on what they’re going to be receiving and how it’s going to affect them because when they inherit the money, they’re going to have a lot of questions. So the more clear and concise answers you can give them, the better off they’ll be.

Kyle: And I think as we look at the big picture here, I think it’s important for investors to remember that as much as the investment piece is an important overall part of your financial life. This other piece of it — the naming beneficiaries, the making sure that we structure this all correct — may be just as important, if not more important, because it’s the one piece ultimately that you lose control over once you pass.

Mike: The beneficiary piece doesn’t get talked about enough, in my opinion, because it’s so far off in the future. You’re in retirement, you’re working toward retirement, you often don’t think of the beneficiaries. But naming those beneficiaries, again, clearly, I’ve said the word numerous times here, I can’t stress that enough. You name them clearly, it’s going to just eliminate all speed bumps in the future and make it so much easier for the people that you want to have this money able to get this money as easily as possible.

Kyle: Mike, thank you very much.

Mike: Thank you for having me.

Mike Hoelzl is an investment advisor at Landaas & Company.

Kyle Tetting is research director at Landaas & Company.

Learn more
5 tips for naming beneficiaries, a Money Talk Video with Mike Hoelzl
When Should I …check my beneficiaries? by Art Rothschild and Isabelle Wiemero
Designating your beneficiaries, by Isabelle Wiemero
Keeping family in the financial loopa Money Talk Video with Isabelle Wiemero
When a loved one passes, what happens to their accounts?, by the Financial Industry Regulatory Authority
Retirement spending with heirs in mind, a Money Talk Video with Dave Sandstrom
Investing for two – for the long run, a Money Talk Video with Isabelle Wiemero
2021 Investment Outlook Seminar, a Money Talk Video
(initially posted November 26, 2021)

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