Beneficiary Designations are an important part of our Legacy Preparation/Pre-Planning Cornerstone.
When constructing your “Financial House,” it’s crucial to pay attention to the intricate details that hold it together. One such detail is naming beneficiaries on retirement accounts like 401(k)s, 403(b)s, IRAs and others. Surprisingly, these beneficiary designations hold more weight than what’s stated in your Last Will and Testament.
Beneficiary designations present both opportunities and challenges within this financial framework. The opportunity lies in bypassing probate for those accounts by simply naming a beneficiary. However, challenges arise as a Last Will and Testament can encompass multiple pages, allowing for specific instructions and legal language regarding one’s estate.
In contrast, the beneficiary designation box on a retirement account form consists of just a single line for a primary beneficiary and a secondary beneficiary. Remarkably, this seemingly insignificant box wields complete control over how the account is passed on to one’s heirs.
For many individuals, their retirement accounts represent their primary or secondary largest asset, closely following their home. Yet, it is disconcerting that a mere box on a form governs the fate of these significant accounts upon their passing. Several issues can arise in this regard:
- Deviation from the typical order of designations: What happens if the designated beneficiaries do not follow the customary succession?
- Involvement of minor children as beneficiaries: What if a minor child is listed as a beneficiary? The implications of such a scenario require careful consideration.
- Conflicting desires among beneficiaries: What if one child wishes to handle the retirement accounts in one manner, while another child has entirely different intentions, such as cashing out the entire account upon the account holder’s demise?
Additionally, it’s crucial to remember the tax implications associated with retirement accounts (excluding Roth IRAs) upon withdrawal. The burden of taxes falls upon the beneficiaries of these accounts, not the estate itself. Naturally, no one desires to leave their loved ones burdened with substantial tax obligations.
Despite its significance, beneficiary designations for retirement accounts are sometimes overlooked during the estate planning process. If you have questions or concerns about your beneficiary designations, call our office at (435)773-9444 to schedule your free beneficiary designation review with one of our Financial Architects.
In essence, building a solid Financial House necessitates meticulous attention to every aspect, including the naming of beneficiaries on retirement accounts. By fully understanding the power and implications of your beneficiary designations, you can establish a robust foundation for your financial legacy.
This is the first article in our “Critical Cornerstone” series.