Here’s a quiz for you:
I don’t need to add beneficiary designations to my IRA, 401(k), annuity or life insurance accounts because I have a will.
I don’t need to worry about IRA, 401(k), annuity or life insurance beneficiary designations because my spouse will automatically inherit my accounts.
If you answered true to these statements, would you be surprised to find out that you’re mistaken?
The Importance of Beneficiary Designations
Beneficiary designations are an often overlooked, yet critical component of estate planning because assets transferred under these designations avoid probate, but not estate tax, and determine who inherits your account upon your death.
Beneficiary designations are considered contracts, and will always supersede your will. So although your will may state who inherits your assets, you want to ensure your beneficiary designations mirror those desires. Contesting beneficiary designations can only be done through the legal system, a costly and time-consuming process.
You should assign both primary as well as contingent beneficiaries to your accounts. Typically, individuals will name their spouse as their primary beneficiary, and their children or a children’s trust as a contingent beneficiary. It is very important that you confirm the proper structure of your beneficiary designation with your attorney to ensure it follows your will and estate plan.
Asset Distribution by Designation
Another consideration, if naming individuals as beneficiaries, are designations such as “per stirpes” and “per capita.” These designations control how assets are distributed if one or more of your beneficiaries is deceased. “Per Stirpes” means taking “by representation” or “class.” For example, say you name your two adult children as your primary beneficiaries, with each receiving 50% of your account. If one child dies, their 50% share would be distributed to their offspring in equal shares. (Without that designation, the surviving beneficiary would receive 100% of the account.)
In a “per capita” situation, all living beneficiaries receive an equal share. However, if a member of the group is deceased, all other beneficiaries’ shares will be increased and children of the deceased beneficiary will not receive an allocation of the inheritance.
Schwab’s IRA beneficiary form provides detailed information about these designations and should be reviewed carefully prior to updating your accounts since rules and laws can vary state to state. We encourage you to consult with your estate attorney to confirm the proper title of your beneficiary designations.
We Can Help
As always, your Soundmark team is here to help. Please reach out to us with any questions, and if you need an estate attorney, we have trusted resources in the Seattle area and are happy to make an introduction on your behalf.
Therese Mille, BFA™is a Client Manager at Soundmark Wealth Management, LLC. She handles the day-to-day operations of the client relationship, ranging from financial transactions to compliance.