Congratulations! You finally decided to buy that life insurance policy you've been putting off for years or to 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 over your assets.
  • If you die intestate (without a will), your possessions become part of your estate, and it is left to the legal system to sort things out. For your heirs, this means more time wasted, more money down the tubes, and more aggravation.

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.

Key Takeaways

  • If you pass away without naming beneficiaries in your will, it can create legal entanglements for your heirs. 
  • Most life insurance payouts are given in a lump sum.
  • IRAs often do not offer the same kind of flexibility in regards to beneficiary payouts as, for example, a life insurance policy.

Completing a Beneficiary Form: The Essentials

When completing a beneficiary form, you need to think about who will get the money in your accounts, and 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 or real estate, or would he use it as a down payment on a 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:

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.

The standard beneficiary form that the insurance company, investment firm or bank uses might not be good enough for you.

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 requires only 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 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.

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. Unfortunately, Moe dies. Shortly thereafter, you die, and the custodian's policy is that Curly and Larry should inherit Moe's share.

However, that might not be what you would have wanted. You might have wanted Moe's six children, your grandchildren, to get their father's share.

An IRA asset will would 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.

Rights of the Beneficiaries

You can also specify the rights of beneficiaries. For instance, you could include stipulations that beneficiaries will be able to withdraw more than the minimum required distributions, transfer money to another institution, or receive only a set amount each month.

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 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 Burden for Beneficiaries

Your beneficiaries may not need the money right away. Suppose your 35-year-old daughter is a well-off professional. If she inherits an IRA from you, the IRS will take up to 37 cents out of every dollar she inherits.

However, you could make it so that this inheritance would stretch over 10 years of your daughter's lifetime. This move can save her a bundle of tax dollars and maximize the ultimate amount she receives.

(Formerly, she could have stretched her withdrawals over her lifetime but changes to the law effective Jan. 1, 2020, limit most non-spouses to a 10-year window for withdrawals from inherited retirement accounts.)

Keep an Eye on the Form

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.

If you can't find your beneficiary forms, contact your agent, financial advisor, or IRA custodian.

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.