Many different assets, whether it be life insurance, an IRA, bank account, etc., allow for a beneficiary to be named. A beneficiary is an individual, or a trust, that will receive this asset upon your death. The beneficiary has no ownership rights during your lifetime and often the beneficiary can be easily changed. The two (2) most common types of assets that allow for beneficiary designations are life insurance and retirement accounts.
What happens upon an owner’s death? When the account owner passes, the beneficiary (who often knows they are the beneficiary) contacts the financial institution and presents a death certificate. The beneficiary is then given the necessary forms to have the account liquidated and/or transferred into his or her name. It really can be that easy.
What if there is no beneficiary named? When no beneficiary is named, the asset would need to be probated in order to be transferred to those named in the Will, or to the decedent’s next of kin. For an asset to be “probated” a family member, or other individual, would need to make a filing with the local Probate Court in order to gain access to the account and then transfer the account to the appropriate individuals. This process can be time consuming and may result in some of the asset being lost to creditor claims. In other words, the asset may be depleted.
A warning about tax deferred accounts. Special attention needs to be paid to tax deferred accounts – IRA’s, 401(k), 403(b) and some annuities. It is always recommended to name a beneficiary on these accounts because without one the account will need to be cashed and the accrued income tax will need to be paid immediately. A good rule of thumb is that 30% of the account value will be lost to taxes. When an individual or a trust is named as a beneficiary, it is possible for that beneficiary to “stretch” the account and therefore pay the income tax in small increments, instead of all at once.
So, in a nutshell, it is wise to pay attention to and take advantage of the ability to name a beneficiary on your assets.