4 Things to Know when Naming Beneficiaries

Designating your beneficiaries is not as simple as putting their names on your will. In many instances, the law will have the final say as to the legality of whatever you have included in your will. So, to ensure that your named recipients will not have troubles later on, here are some very important things to know before you list down their names.

1. Jurisdiction of Your Will

Normally, your will shall govern how your personal assets will be distributed. But there are cases where it will have no power or jurisdiction. This can happen if you have personal accounts like insurance policies, 401k, IRA, or other forms of annuities where you are required to specifically designate your beneficiaries. Therefore, even if you have omitted a person from your will, that same person can still partake of your personal assets if you have included his or her name as beneficiary in your personal or financial accounts.

If you really want to write out a person from your list of recipients, make sure to update your personal accounts. Moreover, avoid leaving the beneficiary area in any application form blank. If you have not fixed your list of heirs in your personal accounts, a probate court will decide how your assets will be distributed.

2. Rules on Retirement Accounts

Naming recipients in a retirement account can be subject to arbitrary rules. For instance, it is more convenient to name your spouse as the beneficiary in your IRA or 401k. This way, your spouse will be able to delay the distribution of your retirement account and the payment of taxes up until he or she reaches 70 ½ years old.

If you decide to name your child instead of your spouse as beneficiary, the distribution of your retirement account and the applicable taxes will take effect in the year following your death. On top of estate taxes, recipients of inheritance payouts will also be subjected to income taxes.

You must also refrain from naming your estate as a beneficiary. This can be a mistake because the law requires that the heirs of an estate must clear out the estate accounts within five years, in effect this can expose your heirs to higher taxes which can significantly diminish gains from their personal investments.

3. Contingent Beneficiaries

Sometimes, the beneficiary dies ahead of the benefactor. If this happens, the distribution of your assets will be decided upon by a probate court or you can always have a new beneficiary. But if you want to ensure the smooth transfer of your assets without regularly altering your will, make it a point to name contingent recipients.

4. Naming a Minor

If your beneficiary is a minor, the distribution of your assets will be administered by a probate court. In most states, the law requires that the distribution of assets to an individual below 18 years old shall be supervised by a court. This can delay and blow up the costs of distributing your assets. To avoid probate, you can hire a lawyer to create a trust on behalf of your minor beneficiary. A trust gives you more control by allowing you to put in certain conditions before your beneficiary can receive payouts.




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