Beneficiary Designations
It is possible that you will not spend all of the funds that you save in your retirement nest egg. As such, you should make plans to ensure proper disposal of those assets, including ensuring that your beneficiaries pay the least amount of income tax possible. Some of these include:
  • Making sure that your beneficiary forms are always up to date. This will help to ensure that the person you want to inherit your retirement assets are the ones that are named as beneficiaries. Failure to update your beneficiary forms could result in your estate or a party other them whom you intend inheriting your retirement savings. Your beneficiary forms should be checked at least once per year and updated whether there is a life-changing event that affects your beneficiary designation, such as the birth of a child that you want to have added as beneficiaries, marriages, death of a beneficiary and divorce where your spouse was the name beneficiary.

  • If you need to ensure that your assets are used for specific purposes, it may be necessary to designate a trust as beneficiary. For example, if you have a child with special needs and want to ensure the funds are used to finance those needs, if you want the funds to be used to cover education expenses for specific parties, or if you have a beneficiary who is a spendthrift and want to control how that beneficiary spends the amount that he or she inherits, a trust may be the solution in such cases.

  • Making provisions to pay income tax that may be due on amounts inherited by your beneficiaries.
Your beneficiary forms and designations should be reviewed by your estate planning professional in collaboration with your financial advisor to ensure that the options you chose are the most suitable for you and your beneficiaries. Working with competent professionals can help to prevent mistakes from being made, such as naming a trust as beneficiary when a trust is not needed to accomplish the desired results.

If you are married, the estate plan for your spouse should be included as well. It is important to understand that your will does not govern your IRAs, qualified plan, 403(b) and governmental 457(b) retirement accounts. Therefore, any provision in your will for those accounts would be overridden by the beneficiary designation forms. If you fail to complete a beneficiary designation form, of if your beneficiary predeceases you and you fail to name a new beneficiary, your beneficiary would be determined according to the default provisions of the governing account agreement. These default provisions could result in someone other than a person that you intended inheriting your retirement savings.

Reducing Estate Tax
Any pre-tax amount inherited by your beneficiaries will be taxable. However, you can reduce your taxable estate by gifting amounts to your beneficiaries while you are eligible. These amounts should be gifted from your regular savings, so that they are not taxable to you. You are allowed to gift up to $13,000 per year per person without being subject to gift tax.

Next: The Complete Guide To Retirement Planning For 50-Somethings: Life Cycle Changes »

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