by Tyler Chriscoe
If you have a 401(k) or an IRA, then you have come across “beneficiary designations,” even if you didn’t realize it. There are places on the paperwork for you to list who the beneficiaries will be and what percentage you wish them to receive after your death. The secondary or contingent beneficiary takes it, if the primary beneficiary is unable to do so, such as if the primary beneficiary has already died.
IRAs and 401(k)s are often referred to as non-probate assets. This means they operate outside of the probate estate, separately from your will. In effect, these operate as “little wills.”
Focus on Both Primary and Secondary Beneficiaries
Each of these non-probate assets provides beneficiary designation forms for you to fill out stating who you want the primary and secondary beneficiary to be. Unfortunately, it is common for spouses to put each other as the primary beneficiary but leave the secondary beneficiary line blank. It is crucial for you to fill out both primary and secondary beneficiaries. Also, it is a good idea to request current beneficiary designation information every five years.
Adverse Tax Consequences
If you fail to make a proper beneficiary designation on a 401(k) or an IRA, then by law, the proceeds go into the decedent’s estate and become a taxable probate asset. For example, imagine each spouse lists the other as the primary beneficiary but leave the secondary beneficiary line blank. When the first spouse dies, the proceeds will go to the survivor spouse. However, if the second spouse’s beneficiary designation remains unchanged, then upon the second spouse’s death, there will be no beneficiary who can receive the proceeds. Therefore, the proceeds will go to that spouse’s estate. Once it goes into the estate, then it faces serious tax consequences and will be taxed as ordinary income. You do not want to accidentally leave your loved ones with a high tax bill.
What You Should Do Now
It is crucial to take the time to make sure that you have proper beneficiary designations. Every estate planner should ask you about these during a conference. The best course of action is for you to take time before you visit your estate planner to obtain current beneficiary designations and make copies of them to show your estate planner that you have properly filled out the paperwork. Beneficiary designations are as vital as anything else in your estate plan. Protect your family by not overlooking your designations.
Chriscoe, an attorney with Robert S. Thompson, PA in Southern Pines, can be reached at 910-692-2244.