Don’t leave your loved ones out in the cold


If you have life insurance policies, retirement accounts or annuities, it is your responsibility to designate a beneficiary. Designating a beneficiary ensures that your loved one or heir is cared for as you wish.

What is a beneficiary

A will is not the only document that establishes who will receive your assets after your death. Assets are often passed on through a beneficiary designation.

Life insurance and retirement accounts, such as 401(k)s, Roth IRAs, and others, are separate from a will. These accounts require a beneficiary, which is the person or entity who will receive the proceeds from these accounts or policies upon your death. In addition, the beneficiary designation on these accounts generally takes precedence over a will.

Name a beneficiary, avoid probate

Many people don’t bother to complete the paperwork and name a beneficiary, or they neglect to name a contingent beneficiary.

Without a beneficiary, the death benefit of a life insurance policy will go to probate. Result: your heirs will have to go to court to obtain the funds, a long and often expensive process.

A qualified retirement account such as a 401(k) will go to your spouse by default. An IRA or Roth IRA may not include this provision, depending on where you live. In all cases, if there is no surviving spouse and no one else is named as beneficiary, the account will go into probate and your heirs will have to go to court to obtain the funds.

Check your spelling

A spelling mistake could cause a lot of anguish among the heirs. Make sure all beneficiary names are spelled correctly. If there are similar names in a family, not having the correct spelling could lead to disputes between your heirs.

Remember that people get married and names change. So be sure to update your beneficiary name when this happens.

Revocable beneficiaries

It is important to be able to change the designated beneficiary. Designating a revocable beneficiary allows you to change beneficiaries whenever you want. Most people go this route when naming a beneficiary. Life happens and things change.

A divorce does not automatically change your life insurance or retirement accounts. Having a revocable beneficiary gives you the ability to make changes.

Irrevocable beneficiaries

An irrevocable beneficiary cannot be changed without the consent of the beneficiary. It is a serious decision that must be carefully considered. Discuss this option with a financial advisor or attorney before naming an irrevocable beneficiary on an account.

Contingent beneficiaries

Another mistake is to have a primary beneficiary but not a contingent beneficiary. A contingent beneficiary is someone who will receive benefits if your primary beneficiary predeceases you.

If your beneficiary predeceases you or is unable to collect your accounts or life insurance and you have not selected a contingent beneficiary, it is up to the courts to select a beneficiary. You risk paying death benefits to your estate and your heirs could be subject to high taxes. The best practice is to have one or more potential beneficiaries.

The SECURE law and designated beneficiaries

The Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019 changed the rules for beneficiaries of retirement accounts. Be aware of these new rules: they may affect the person you decide to designate as beneficiary.

One of the main results of the SECURE Act was to change who can benefit from the “stretched” provision. This provision allows beneficiaries to “stretch” distributions from an inherited account – and associated taxes – based on their own life expectancy. It also allows for continued tax-deferred growth.

Under the SECURE Act, designated beneficiaries can no longer avail themselves of the extendable provision. Designated beneficiaries must now deplete inherited accounts within 10 years of the death of the original owner. This applies to people who died after December 31, 2019.

While adding more restrictive rules for designated beneficiaries, the SECURE law also added a new type of beneficiary that receives special treatment: the eligible designated beneficiary. An eligible designated beneficiary has more flexibility when it comes to withdrawing funds from an inherited account and can still take advantage of the stretch provision.

The three groups of beneficiaries are now eligible designated beneficiaries, designated beneficiaries and non-designated beneficiaries. These categories are based on the heir’s relationship to the deceased account holder, age, and status as an individual or non-person entity.

Eligible Designated Beneficiary Categories

There are five categories of “Eligible Designated Beneficiaries” (EDB): a surviving spouse, a child under the age of 18, a chronically ill person, a disabled person, and any other person up to 10 years of age. less than the deceased account holder. An eligible designated beneficiary is always an individual – it cannot be an entity other than a person.

As a reminder, the SECURE law allows an EDB to take advantage of the extensible provision. This means that the deceased’s retirement accounts can be “stretched” over the expected life of the EDB.

Designated beneficiaries and the 10-year rule

Anyone who does not fit into the five categories of the EDB is considered a designated beneficiary.

A designated beneficiary can inherit retirement accounts, but unlike the EDB, a designated beneficiary cannot take advantage of the stretch rule with respect to disbursements.

Instead, there is a 10-year rule that applies to named beneficiaries who inherit retirement accounts. The balance of the retirement account must be withdrawn before the end of the 10th year following the death of the account holder. Consult your lawyer or financial advisor about the required minimum distributions over the 10-year period, as the rules governing them continue to change.

Unnamed beneficiaries

An unnamed beneficiary is an estate, charity, trust, or anything else that has no life expectancy (in other words, not a person).

An undesignated beneficiary is also subject to withdrawal rules, depending on the age of the deceased.

Under the 5-year rule, if the deceased died before age 72, the unnamed beneficiary must cash out the retirement accounts within five years. Funds must be withdrawn by December 31, five years after the death of the deceased.

But if the deceased person died after age 72, the unnamed beneficiary can withdraw the remaining balance over what would have been the deceased person’s life expectancy.

Make a claim

Whether you are the beneficiary of a life insurance contract or a retirement account, when making a claim, you will need a certified copy of the death certificate. Funeral directors usually provide copies of the death certificate to submit with claims like this.

Review your beneficiaries

Sit down with a legal representative or financial advisor to determine who you will designate as your beneficiary. Then, make sure your wishes are carried out, by updating insurance policies and retirement accounts. Finally, always make sure you have named a contingent beneficiary, in case your primary beneficiary is deceased or unable to collect.

The Epoch Times Copyright © 2022 The views and opinions expressed are solely those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.


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