Often overlooked but deserving of special attention, beneficiary designations help pass along assets upon the death of an account holder.

To prevent undesired outcomes and optimize wealth transfer to desired recipients, it’s important to keep these beneficiary designations current.

When and What to Update

Stories of assets inadvertently passing to ex-spouses after an individual failed to update beneficiaries abound. That’s because beneficiary designations often override instructions left in a will.
When there’s a change in marital status or in legacy goals, it might be time to update beneficiaries. Account holders should review the following:

  • Retirement plans (401k, IRA, Roth IRA)
  • Taxable accounts with ‘transfer on death’ designations
  • Life insurance policies and annuities
  • Stock options, restricted stock, employee stock purchase plans
  • Deferred compensation plans

It’s a good idea, too, to have a backup plan. Designating a contingent beneficiary directs assets to a “backup” beneficiary if for some reason the primary beneficiary isn’t around.

Complex Beneficiary Designations

Sometimes a beneficiary designation doesn’t fit the boxes provided on forms, such as when a designation is more elaborate than “100% to my spouse—and if he/she predeceases me, 50% to each of my two children.”

Many institutions allow individuals to submit a written document—typically provided by an estate planning attorney—instructing how assets will be distributed in cases of complex designations.

These lengthier beneficiary designations frequently accompany estate plans that include trusts or complex tax planning.

Per Stirpes vs. Per Capita

Latin for “by roots,” per stirpes calls for each branch of a person’s family to receive equal distribution of assets if one of multiple beneficiaries predeceases the account holder.

Consider Pete, a widower with two children, Erik and Stephanie. Erik and his spouse have three children, and Stephanie and her spouse have two children. Pete designated Erik and Stephanie as 50% primary beneficiaries.

Suppose Pete’s children predecease him and Pete subsequently dies without changing beneficiaries. Per stirpes, Stephanie’s two children would each receive half of his 50% and Erik’s three children would each receive one-third of his 50%.

By contrast, Pete could also elect to distribute assets per capita, or “by heads.” This means that if both of Pete’s children predecease him, the surviving five grandchildren would each get one-fifth of the assets.

Charitable Planning

Using retirement plan beneficiary designations to fulfill charitable bequests can be an effective way to optimize wealth transfer.

As a tax-free entity, a nonprofit that receives assets through a retirement plan beneficiary designation receives 100% of the amount.

While an individual beneficiary of an inherited retirement plan has some flexibility in the timing of paying taxes, plan assets are subject to ordinary income taxes as they are withdrawn.

If all or a portion of an estate will be directed to charity, sourcing this bequest from tax-deferred assets will optimize wealth transfer to children or heirs.

Talk to the Experts

For questions on designated beneficiaries, we are here to help. We routinely review beneficiary designations in our regular account reviews. If something has changed since our last conversation, please reach out to us.

In addition, your estate planning attorney can help structure your beneficiary designations to align with your legacy goals.