Designating Your Beneficiary

Talking about death and finances is awkward. However, these important conversations can help avoid heartache and stress later down the road.

For example, it’s important to talk about who will serve as your beneficiary — the person who will receive your financial assets if something happens to you. Your primary beneficiary will inherit your assets. However, in the event something happens to the primary beneficiary, a secondary beneficiary can sometimes be listed.

Although a beneficiary is often a person (family member or friend), it can also be a charity, trust or institution. However, some things, such as estate taxes and mandatory taxable payouts, should be considered when choosing a beneficiary.

Designating a spouse as a beneficiary often allows the spouse to inherit assets without generating estate taxes, or, in regard to a retirement account, without taking a mandatory taxable payout. This isn’t always true for other beneficiaries. If an heir is given too many assets, they may have to pay federal estate taxes. These can range from a few thousand dollars to several hundred thousand depending on the size of the estate. However, tax breaks like the unified credit and the lifetime exclusion amount typically mean that any estate worth less than $11.4 million will be free of estate tax. Retirement plans like 401(k)s make the beneficiary withdraw the money immediately and then pay income taxes on the full amount, or take required taxable distributions every year in an amount based on IRS life expectancy tables.

If you choose a minor as your heir, consult with an attorney to explore the options available to you in your state. Choosing a charity or a non-profit group as your beneficiary, however, will avoid taxes on the inheritance completely.

Because there are so many considerations when choosing a beneficiary, it is important to do your research. Additionally, make sure your beneficiary designations are up to date, since beneficiaries will become active immediately upon death.

Content by Lockton Dunning Benefits with info from