June 14, 2004 -- Have you recently gotten married or gone through a divorce? Started a family or have a child entering adulthood? Retired from your job or experienced the death of a loved one? Any of these life events could mean that your beneficiary designations are no longer current. And that could create complications (or even have potentially devastating long-term effects) for your heirs some day.

Beneficiary-designation documentation is easy to complete and even easier to forget.  But it is very important to keep your financial assets in order.  Many individuals don’t realize the significance of beneficiary designations. For instance, in the event of your death these forms actually override your will.

And, if no valid beneficiary designation is documented, and no will exists, your home state’s intestacy laws will determine who inherits your assets.

When you update your beneficiary designations to reflect your current situation, keep the following tips in mind:

• Beneficiary designations are easy to change in most, but not all, cases.  Typically, all you have to do is fill out a new form and sign it.  However, some beneficiaries cannot be changed.   For example, if your divorce agreement stipulates that your ex-wife must be the beneficiary of your life insurance policy, you cannot change that designation.  Or, if you took out life insurance as collateral for a loan and named the lender as the beneficiary, the lender may require that you not change the beneficiary designation until the loan is paid.

• Children cannot be named as beneficiaries.  If your child or grandchild is under-age (18 or 21, depending on your state’s laws), you cannot name the child as a beneficiary of a life insurance policy, retirement plan or annuity.  However, you can name a guardian to receive the assets for the child’s benefit, or set up a trust for the child and name the trust as the beneficiary.  Upon your death, the trustee will become the legal owner of the proceeds, and the child, as the trust’s beneficiary, will become the beneficial owner of the proceeds.  After the child reaches adulthood, you can revoke the trust, if the terms of the trust allow it, and change the beneficiary designation to your child’s name.

• Expect to name both a primary and a contigent beneficiary. The primary beneficiary is your first choice to receive the asset upon your death.  The contingent, or secondary beneficiary will receive the asset if the primary beneficiary is no longer living when you die.

• Consider tax implications when naming a beneficiary. When you update your designations, you and your beneficiary should determine what options are available to the beneficiary for taking the proceeds of the asset when you die, and the tax and investment implications of each option. For example, the beneficiary of an IRA must pay income taxes on the proceeds, and the estate tax may be due as well.  Some retirement plans allow the beneficiary to take the assets within five years.  To avoid both income and estate taxes, you can name your spouse as the beneficiary.  A husband or wife does not pay estate taxes on qualifying distributions received from his or her spouse.  So, your husband or wife can roll over your retirement plan to his or her IRA without having to pay income taxes on the amount until it is withdrawn.  However, your adult children cannot roll over your retirement plan to their IRAs.

• If the beneficiary you named has died, state law will determine who receives the asset.  The presumption is that the heirs named in your will should receive the proceeds, but that could be challenged.  For example, if you name your best friend as the beneficiary, forget to change the designation when the friend dies, and you later die, your friend’s spouse or children could claim that they are the rightful heirs of the retirement proceeds, not the individuals named in your will.

These are all compelling reasons for keeping beneficiary designations up-to-date.  While you are in the process of reviewing these documents, take a look at other critical, but often overlooked documents, such as your power of attorney, health care proxy, and the co-signer from for your safe deposit box.  Make sure that you want the people you named to remain on those documents.  Review your bank accounts, mutual funds, stocks and bonds.  You may own these assets with another individual, or own them alone with a person or trust named to receive the asset at your death.  Ask yourself if this is still the individual or entity you want to receive those assets.

For sound financial advice or to make sure your beneficiary designations are up-to-date, contact Madeline Janowski at 215-564-1900 .

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