Considerations When Designating Beneficiaries

When buying a life insurance policy, a deferred annuity contract, or an individual retirement account, it is important to understand the numerous aspects of naming someone as a beneficiary. Naming designated beneficiaries allows your money to pass directly to the beneficiaries at your death without subjecting them to the probate process or other legal system. Standard beneficiary forms, however, may not leave your money in the way you had hoped.

When completing the beneficiary form, it is important to consider how the beneficiaries will receive the money at your death (e.g. lump sum, period certain, amortization over the beneficiary’s life expectancy). With individual retirement accounts it can be harder to have beneficiaries receive the money in the manner you want. Typically, after naming a primary and secondary beneficiary, the custodial institution’s policy in the individual retirement account will determine how beneficiaries are paid. An “IRA asset will” allows the policy holder to give more detail on how his or her assets will be dispersed.

Considering the beneficiaries’ tax burdens and attempting to reduce them is another important consideration when naming beneficiaries. Additionally, a policy holder should review the beneficiary forms on a yearly basis to ensure their accuracy and relevance.

See George D. Lambert, Why Your Will Should Name Designated Beneficiaries, Forbes, Dec. 2, 2010.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.