Your beneficiary isn't just another name

PERSONAL FINANCE

Dollars & Sense

January 28, 2001|By EILEEN AMBROSE

Buy a life insurance policy, invest in an individual retirement account or participate in your employer's pension plan and you'll be asked to name a beneficiary.

If you think the name you scribble down doesn't matter much, think again. Or, think of this case:

A woman with three daughters bought a life insurance policy that had only two lines on which to jot down beneficiaries, said Jim Thompson, director of shareholder education with AARP Investment Program from Scudder in Boston. Rather than add an attachment to the policy to include the third child, the mother listed two daughters as beneficiaries and periodically rotated the names, he said.

When she died, the daughters on the policy at that time inherited the proceeds. They gave their sister some money, but it wasn't the one-third share she felt she was due, he said. As a result, Thompson said, "the family is splintered forever."

Naming beneficiaries on accounts and insurance policies allows those assets at the time of the owner's death to pass automatically to heirs and avoid probate, an often costly, time-consuming process in which the court oversees the distribution of assets according to a will.

Too often, people name beneficiaries without thinking through the consequences to their family or estate plan, financial experts said. And once choices are made, they frequently are forgotten and not updated, leading to unintentional results.

For example, an ex-spouse may be the unwanted heir to a life insurance policy, or a family member may lose government aid because of a small inheritance.

Many times, too, people wrongly assume that their wills will correct any beneficiary mistakes, experts said. But beneficiary designations made on life insurance policies, IRAs and many other assets will override wishes stated in a will.

Experts advise keeping a master list of beneficiaries and reviewing it once a year, or at least when there has been a marriage, divorce, birth or death in the family.

Here are experts' suggestions for those considering beneficiaries:

Retirement accounts. If you're married and have a traditional pension, you must name your spouse as the beneficiary unless he or she signs away the right to the survivor's benefit.

With a 401(k), check out the rules of the plan. Some require that a spouse be named as beneficiary unless he or she forfeits a claim. Others allow workers to name anyone they want, according to the Internal Revenue Service.

You don't need to name a spouse as a beneficiary of an IRA. And, under new rules proposed this month by the IRS, IRA owners will have more flexibility in designating beneficiaries.

Under one of the proposed changes, IRA owners would no longer need to name a beneficiary by the time they began taking required minimum distributions. And, after IRA owners died, their beneficiaries would have until Dec. 31 of the year after the death to disclaim an inheritance or be cashed out. The rules are expected to become final next year, after public comment, but the IRS said taxpayers can begin relying on the rules for required distributions for this year.

Children as beneficiaries. Don't name minors, because youngsters aren't allowed to own securities and other property, experts said. If your beneficiary is 8 years old when you die, the court might have to name a guardian, who would need to make regular reports, a cost of time and money, to the court on how the assets are being used, experts said.

It's not uncommon for young adults inheriting sizable sums to lack discipline and go through the money too quickly, experts said.

In either situation, experts recommend setting up a trust for the child and naming the trust as beneficiary. You can pick the trustee who will use the assets to the benefit of the child. And you can spell out the terms under which the assets eventually will be distributed, such as the money going to the child when he or she is 30.

An estate as beneficiary. Financial experts also recommend against naming an estate as a beneficiary. Doing so will cause assets to go through probate and can erode an inheritance through higher taxes and court costs.

Be aware, too, that not designating a beneficiary will cause your estate to become your beneficiary by default.

And don't forget to name a secondary beneficiary in case your first choice dies before you do. With no contingency beneficiary, the assets again will become part of your estate that must go through probate, experts said.

Government aid. Be aware that if you leave money directly to a child with a disability or a relative in a nursing home, you can make them ineligible for government aid, such as Medicaid, said Jason Frank, a Lutherville lawyer. Those receiving government benefits cannot have more than a minimal amount of assets in their name to remain eligible, he said.

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