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Diversified Estate Services, LLC, a Registered Investment Advisor
Properly Naming Beneficiaries
Primary and Contingent
Without a properly named beneficiary, your IRA assets can be substantially
diminished due to probate costs and excessive taxes. There are two categories
of beneficiaries that need to be named, primary and contingent.
Upon the death of the owner the account is divided among all primary
beneficiaries. This is done either by a dollar amount indicated on the
beneficiary election form or a percentage. If neither is indicated the financial
institution will divide the account equally between all living primary beneficiaries.
If no primary beneficiary is alive, the funds are paid to a contingent beneficiary.
Unfortunately, without a contingent beneficiary named, the account will go to the
estate and face probate. Be sure to name a contingent beneficiary on your
tax-deferred retirement accounts. In most households with children, the spouse
will be named as the primary beneficiary and the children as contingent
Is it possible to accidentally disinherit a loved one with a wrong beneficiary
designation? Absolutely! By not using per capita or per stirpes designations it's
quite possible that your IRA could end up not going to the family or persons you
Here's how it works:
Let's say you have two children Sam and Deborah.
Sam has four children of his own and Deborah has no children. While Sam and
Deborah are alive, they will share your IRA equally when you die.
However, your intentions are that Sam's share of the inherited IRA go to his children should Sam die before you do. If Sam dies first and then
you die, without any special notation on the IRA beneficiary designation form you will disinherit your grandchildren and the entire IRA will go to
To prevent this from happening and to pass your IRA to your lineal descendents, in this case Sam's children, use the words "per stirpes" after
Sam's name on the beneficiary designation form. Without this notation, the IRA will pass "per capita" and will be shared among the other
Using the above example we saw how easy it is to unknowingly disinherit a beneficiary. Most financial institutions assume a "per capita"
distribution and will pay the IRA only to those beneficiaries living at the death of the owner. If Sam and Deborah had no children, the issue of
"per capita" or "per stirpes" would not be of concern.
What is important to note here is that most financial institutions assume "per capita" allocations unless it is otherwise indicated. Speak with
your legal professional for more information. Be sure and review your beneficiary designations when a death in the family occurs.
Living Trusts and IRAs
Most families assume the creation of a living trust will take care of the entire estate burden their family will face when that day comes. For IRA
accounts this is not correct. A living trust has many purposes.
However: A LIVING TRUST DOES NOT ELIMINATE INCOME TAXES ON YOUR IRA
A properly drafted living trust can protect your estate from federal estate taxes. These are the tax is assessed by government on the total
estate. Regardless of estate taxes, income taxes on IRA accounts are still due and payable by the beneficiary regardless of the size of the
estate. See your estate advisor to determine if estate taxes are a concern for you.
Although trusts can provide many functions, its primary function is to protect assets from probate that do not automatically bypass. Assets like
houses, brokerage accounts, investment property and bank accounts generally require a trust to avoid probate. With a properly named
beneficiary, IRAs will avoid the probate process.
There Are Some Exceptions...
There are some reasons to name a trust as the beneficiary but you must have a trust specially drafted to take full advantage of this. Some of
these reasons might be a special needs child who needs a trustee to administer their funds. Another reason may be that you do not want to
give up full control to your heirs and you want your trustee to control the distributions. You may also have a very large estate.
Naming a Charity as a Beneficiary
For families who have charitable inclinations, there are good reasons to give your tax-deferred wealth to charity at death verses other
appreciated assets. Assets like real estate currently receive a step up in tax bases at death. This means there is no tax due upon the sale or
liquidation of assets at your death. Tax-deferred IRA accounts on the other hand have taxes due on the account at death. Those taxes are the
responsibility of the beneficiary.
If you were going to leave part of your estate to charity, consider leaving an IRA. Since a charity does not pay any taxes, they would not owe any
taxes upon receipt of these accounts. By bequeathing your tax-deferred IRA to charity, your family avoids receiving an asset that comes with a
Changes In Your Family
If a change occurs in your family such as a death, divorce or remarriage a review of your beneficiary elections on your retirement accounts
should be done. Sometimes children or grandchildren are born after the initial beneficiary forms have been completed. If this is the case, an
update in your beneficiary designations should take place to be sure that no one is accidentally excluded. Be sure to file the new form in the
DOCUMENTS section of the IRA Estate Planner™.
Prepare Your Heirs Now
The inheritance of an IRA can be a financially taxing and disappointing affair when family beneficiaries are unprepared. It is the beneficiary
who is responsible for the taxes due on these accounts and this is the biggest surprise of all.
To further exacerbate the problem, inherited tax-deferred retirement accounts can force your heirs into a higher tax bracket on all of their other
household income. In fact, it's possible that beneficiaries could be pushed into the highest federal income tax bracket. If your state has a
state income tax, that would be an additional expense.
Most families DO NOT have the necessary wording in their trust to name the trust as the beneficiary and take full advantage of the laws
regarding the stretch IRA. Unless your attorney has communicated IN WRITING to name the trust as the beneficiary, it is probably not a good
|For more information for your personal planning, fill out the form below and Rick or Radon will be glad to contact you.