With an aging population, one question that comes up more and more often from clients is: where does my money go when I die? The flip side to that question is to ask: where do you want your money to go after you die?
With the increasing popularity and accessibility of retirement plans, many Americans hold a significant portion of their assets in 401(k)s or other employer-sponsored retirement plans and IRAs versus non-retirement accounts. Quite often these accounts represent the largest portion of their wealth outside of their homes. If you're like the majority of individuals you will likely need income from these accounts during retirement, or you may have accumulated sufficient other assets to sustain your lifestyle and wish to preserve your retirement assets for your heirs.
An important first step in preserving these assets is to understand the rules regarding retirement plan and IRA beneficiaries to ensure your wishes are fulfilled. The rules affect who inherits the assets, how quickly they are paid out, and the tax consequences. While you should consult with your tax and estate attorney for advice regarding your specific circumstances, the following provides an overview to help you get started.
- Work with your financial advisor to inventory all of your retirement accounts and make sure the beneficiary information is up to date. It's also a good practice to designate both primary and contingent beneficiaries. A contingent beneficiary will inherit assets only if you have no surviving primary beneficiaries at the time of your death or if they disclaim or refuse the inheritance. Additionally, you can name more than one primary or contingent beneficiary and specify which percentage of the account they should receive.
- Your financial advisor should review your beneficiary designations periodically. Situations affecting designations include death of a beneficiary, divorce, marriage, or the birth of a child or grandchild. Remember, a will does not supersede your beneficiary designations on retirement accounts.
- Common beneficiary designation options include naming your spouse, a non-spouse, or an entity such as your trust, estate, or a charity. Whenever possible, you may want to avoid naming an estate as your beneficiary as this requires your assets to enter the probate process.
- For married couples, naming a spouse may be the natural choice, but there are other reasons why this makes sense. When an IRA passes directly to a spouse, it avoids probate and qualifies for the unlimited marital deduction. Additionally, your spouse has the option to move the assets into an inherited IRA or roll the assets into an IRA in his or her own name. Which option is better depends on the ages of the deceased and surviving spouse and when the surviving spouse may need to take money from the IRA. This ability to roll the assets into his or her IRA is available only for spouse beneficiaries. Both spouses and non-spouses can move the assets into an inherited IRA.
- While it is typical practice for most IRA owners to name a spouse as the primary IRA beneficiary and their children as the contingent beneficiaries, this may require the surviving spouse to take more taxable income from the IRA than he or she really needs. If income needs are not an issue for the spouse and children, then naming younger beneficiaries (such as grandchildren or great-grandchildren) allows you to stretch the value of the IRA out over one or perhaps two generations. Work with your advisor to determine what solution may be best for your family.
- Have your advisor explain the difference between the "standard" and "per stirpes" beneficiary designation. Most IRA contracts have a standard designation where your beneficiary must be alive upon your death to inherit his or her share. Some IRA contracts offer a per stirpes designation - in the event a beneficiary predeceases you or refuses the inheritance, then his or her share would pass to their descendants, usually their children. For example, you have designated that your two children are to equally share your IRA assets. If one of your children dies before you do and you have not updated your beneficiary form, without the per stirpes designation, your surviving child would receive 100% of the assets.
While this information offers you education and guidance to get started, you should keep in mind how your retirement accounts fit into your overall retirement income and estate plan. I recommend that you meet with your financial and tax advisor to receive personalized recommendations and create a plan for distributing your retirement assets that suits you and your legacy. The best way to know where your money goes when you die is to make a plan to ensure your wishes are carried out.
Caroline Hill, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).