When was the last time you reviewed your beneficiary designations? The beneficiaries you name on your financial accounts take precedence over a trust or will. That\u2019s why making sure your beneficiary designations are current is critical. We recommend reviewing your beneficiaries annually, and after major life events like marriage, divorce, a new child, and death.<\/p>\n\n\n\n
When you open accounts like IRAs, 401(K)s, and Health Savings Accounts you are asked to name your primary and contingent beneficiaries. A common mistake is not naming contingent beneficiaries. If your primary beneficiary passes, and there\u2019s no contingent beneficiary, your assets will go to your estate and the probate process. If you don\u2019t have a will, a court will decide who inherits your assets. Certain accounts like 401(K)s have strict rules requiring you to name your spouse as the primary beneficiary. Your spouse must agree, in writing, to naming someone else.<\/p>\n\n\n\n
Your beneficiary can be a person, a charity, a trust, or your estate. Who you name as a beneficiary, including the type of financial account you designate to them, can have major tax (and non-tax) implications. For example, if you\u2019re an adult child, would you rather inherit assets from a Roth or pre-tax IRA? You\u2019ll enjoy tax-free withdrawals from the Roth versus having to pay ordinary income taxes on withdrawals from the pre-tax IRA.<\/p>\n\n\n\n
Your spouse is the only person who can inherit your IRA and treat it like it is theirs. Spouses can roll over inherited IRA assets into an existing or new IRA. This may be a good option if the surviving spouse won\u2019t need to use the IRA funds or she\u2019s above 59 \u00bd years old. Another option is to transfer the assets to an inherited IRA. A spouse can withdraw assets in an inherited IRA without penalty. There are additional rules such as continuing required minimum distributions once they\u2019ve begun or ensuring the assets stay in a Roth IRA for 5 years before withdrawing them, so you\u2019ll want to consult with your Azzad Advisor.<\/p>\n\n\n\n
If you name minor children or grandchildren as beneficiaries, then your will must name a guardian to manage the assets on their behalf. If you want your minor children to be able to access your assets while they\u2019re still children, then setting up a trust or custodial account may be a good solution. If you have a child with special needs or an adult child whom you don\u2019t think should receive the assets outright, you may want to set up a special needs trust on their behalf.<\/p>\n\n\n\n
With the passing of the SECURE Act, naming a non-spouse as your retirement account\u2019s beneficiary can have significant tax consequences. The 10-Year Rule means that most non-spouse beneficiaries will be required to distribute the entirety of their inherited retirement accounts by the end of the tenth year after your death. Previously, they could shelter a large portion of the inheritance from taxes by \u201cstretching\u201d it out among their life expectancy.<\/p>\n\n\n\n
Be aware of the implications when naming a non-person beneficiary and how that may affect your estate planning goals. Doing so can have major implications depending on the type of financial account. If naming a trust, consider reviewing its provisions to ensure it is still current and relevant to your wishes. A common mistake we observe with clients is creating a trust, only to overlook transferring assets (including property) into it. If you are charitably inclined, consider assets that are better suited for charitable giving. These are assets that do not receive a step-up in basis (i.e., non-qualified accounts) and\/or assets that are taxed as ordinary income (i.e., pre-tax qualified accounts).<\/p>\n\n\n\n