Congratulations! You finally decided to buy that life insurance policy you've been putting off for years, or put some money into a new deferred annuity contract or Individual Retirement Account (IRA). The check has been written and the application filled out. Now all you have to do is complete the beneficiary form - an inconspicuous little page tucked toward the back of the application. Just check off a box or two, sign it, and you're done. But wait!

If you're like most people, there's a good chance you'll name someone as a beneficiary without fully appreciating just how valuable this feature truly is. In this article, we'll help you go beyond the obvious to make the tough decisions when it comes to choosing your beneficiaries and how they'll receive their benefits.

Why Beneficiaries Matter
First, it's important to understand what generally happens to your possessions and property after you die:


  • If you have a will, your loved ones must still go through the probate process to get what you left them. This can get expensive, and it can take months or even years if a disgruntled relative starts a fight about your assets.
  • If you die without a will (called intestacy), your possessions become part of your estate for the legal system to sort out. For your heirs, this means more time wasted, more money down the tubes and more aggravation. (To learn more, check out Why You Should Draft A Will.)
There is a solution to these problems. You can name designated beneficiaries. It's a pretty simple concept: You list who will get the money and what percentage each will receive. Then after you die, your beneficiaries present a death certificate to the financial institution and fill out a form. The check arrives in a few weeks. There's no probate, no court involvement, no expense. However, the standard beneficiary form that the insurance company, investment firm or bank uses might not be good enough for you.

Completing a Beneficiary Form: The Essentials
When completing a beneficiary form, you need to think about not only who will get the money in your accounts, but how they'll get it.


Ask yourself: Could your beneficiaries handle a large lump sum of money? Would they invest it wisely? For instance, what would your 21-year-old son do with a $100,000 life insurance benefit? Would he put it in stocks, real estate or some other investment; or would he run out and buy a new Porsche 911-Turbo?

If you are concerned your beneficiaries couldn't handle a large lump-sum payment there are other options.


Annuities and Life Insurance
Several annuity and life insurance companies now have a form that allows contract owners to designate how beneficiaries receive the death benefit. Generally they offer three payment options:


In addition, you could even split up the benefit so that your beneficiaries get part of it as a lump sum with the balance as systematic payouts.

Individual Retirement Accounts
Your IRA might not have the same type of beneficiary payout options as annuities and life insurance do. The standard beneficiary form that you fill out when you open the account usually only requires that you name a primary and a secondary beneficiary. Other than that, the custodial institution's policy, not your objectives, will determine how funds get paid out to your heirs.


Therefore, what's possibly your largest financial asset is covered only by a simple, one-page document that may not come close to expressing your intentions about who should inherit the retirement funds you worked so hard to acquire or how they should get them.

That's not all. There's another potential problem.

Suppose, for example, you're single with three grown children (Moe, Curly and Larry). You name each one an equal beneficiary on your IRA. Moe dies. Shortly thereafter, you die, and the custodian's policy is that Curly and Larry should inherit Moe's share. However, that's not what you wanted. You wanted Moe's six children, your grandchildren, to get their father's share.

An "IRA asset will" could have prevented this from happening. This type of will gives you the ability to spell out in greater detail what you want to become of your accounts. You can also specify the rights of beneficiaries. For instance, you could include stipulations that beneficiaries will be able to remove more than the minimum required distributions, transfer money to another institution or only receive a set amount each month. (For related reading, see 6 Important Plan RMD Rules.)

Most attorneys can prepare an IRA asset will; for you. If you can't locate one, ask your accountant or financial advisor to recommend someone. After the document is completed, submit it to the custodian for a signature. Some custodians, however, will not unconditionally accept the form. Some may request a disclaimer promising not to hold them responsible. Others may allow it, but only if the document does not conflict with the terms of their custodial agreement. Often, it depends on how persuasive you are and the size of your account.

Reducing the Tax Burden for Beneficiaries
Your beneficiaries may not need the money right away. Suppose your 35-year-old daughter is a well-heeled professional. In the case of an IRA you leave to her, the IRS would confiscate up to 35 cents out of every dollar she inherits.


However, you could make it so that this inheritance would stretch over your daughter's lifetime. This move can save her a bundle of tax dollars and maximize the ultimate amount she receives.

Final Checklist
Before you sign that beneficiary form, think about not only who will get your money but how. And then each year thereafter, review the beneficiary forms you filled out for any annuities, life insurance, IRAs or other retirement accounts. And if you can't find your beneficiary forms, contact your agent, financial advisor or IRA custodian. (For more on how to do this, read Update Your Beneficiaries.)


Also review the IRA custodial agreements on your accounts. Check the agreement's policy on:

  • Stretch distributions
  • Customized beneficiary forms (IRA Asset Will)
  • Trustee-to-trustee transfers
  • Non-spouse beneficiaries moving investments after the owner's death
  • Beneficiaries naming a beneficiary
  • Default provisions in case a beneficiary predeceases you and you fail to make subsequent changes
If you decide to specify how your beneficiaries will receive your money, there's a chance they won't be thrilled. But you'll have the peace of mind of knowing that the money you leave your loved ones will last much longer … just as you hoped it would.

For more estate planning tips, see Getting Started On Your Estate Plan and Choose The Right Executor.



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