LITTLE ROCK, Ark. (KTHV) -- Beneficiary designations are critically important, but unfortunately they're often overlooked, mishandled or even forgotten.
Eric Hutchinson, a Certified Financial Planner with United Capital Financial Advisers joined THV This Morning to tell us more about the importance of beneficiary designations. He answered some important questions:
Why are beneficiary designations so critical?
Designating beneficiaries is a very critical step in the proper handling of many important documents. Life insurance, retirement accounts, bank accounts, investment accounts all may require you to choose who will benefit from the account should something happen to you. A beneficiary designation is your legal instruction as to who should get the money in your account if you were to die prior to using the money yourself.
Sadly, many people will often list a spouse or a child as a beneficiary, and do so without even giving the matter a second thought. The problem with this is that in many cases, there are legal issues to be considered when choosing beneficiaries. Even if the choice for naming a beneficiary was a well informed choice at the time, it is important to keep them up to date with changing circumstances.
For example, we often find people have life insurance policies they have owned for a very long time and haven’t actually looked at the policy in many years. When we do a review of their policies, we discover things like an ex-spouse or even a deceased person still named as a beneficiary. Or we find a minor child named as a beneficiary.
What about beneficiary designations on retirement accounts?
Most retirement accounts, such as IRA accounts, 401(k) accounts, 403(b) accounts, etc. need to have up to date beneficiary designations on file with the plan sponsor.
In the case of IRA accounts, the beneficiary designation should be on file with the financial institution handling the account. In the case of 401(k) and other employer sponsored retirement plan accounts, the beneficiary designation should be on file with the employer and the custodian of the retirement plan.
When it comes to retirement accounts of any kind, typically the ideal primary beneficiary is your spouse, then your children as secondary beneficiaries. The point here is that living persons make the best kind of beneficiaries for retirement accounts.
If you have a trust created as a part of your estate planning, the trust may be a beneficiary of last resort because of the difference in the way the tax laws treat living persons vs. trusts.
In general, a living person is the appropriate choice to be a beneficiary of a retirement account. One exception to this rule is that a qualified charity could be a beneficiary of a retirement account. You should consult your estate planning attorney or other appropriate advisor for guidance on naming beneficiaries.
Now the good news is that you can easily change a beneficiary. If you want to learn more, you can email Eric at email@example.com and ask for a free checklist of things to consider when choosing a beneficiary.
For a full printable client beneficiary checklist, click here.