When you hear the word "beneficiary," you probably think of someone inheriting a lot of money -- the beneficiary of a will. But in reality the word covers a lot more than wills and estates. The dictionary defines beneficiary as "the recipient of funds" -- from a will, trust, retirement plan or life insurance. But that doesn't begin to cover the details and the differences.
Here are five things you need to know:
1. Beneficiaries of a traditional will must wait for their money. A beneficiary listed in a last will and testament receives the money or property only after the will has gone through probate -- the court-arranged process of changing title and distributing assets, after appropriate taxes (if any) have been paid. The process can take months or even years, depending on the complexity of the estate -- and legal fees can be costly. That's why many choose to create a Revocable Living Trust as an estate plan. The successor trustee can then distribute assets directly to the named beneficiaries -- without going through probate.
2. Beneficiaries of life insurance policies or retirement plans receive the money directly. Those assets do not go through the probate process. Instead, the proceeds are delivered to the individual named as beneficiary, requiring only proof of death of the account owner and proof of identity of the beneficiary. Be sure to name a contingent beneficiary on these accounts, in case your intended beneficiary is deceased (perhaps in an accident where you are both killed).
3. It is usually unwise to name a minor child as beneficiary of a life insurance policy. Instead, set up a trust that will be created at your death, naming a trustee to manage the money and distribute it at a certain age, or in stages, over the child's life. If you fail to name a guardian or trust, the state may take over the asset -- assigning a lawyer to manage the money, often at great expense and not according to your wishes. Be sure to name the trust as the beneficiary of the life insurance policy.
4. Think carefully about naming beneficiaries for retirement plans. Naming the "correct" person could allow your IRA to continue growing tax-deferred over many years -- either over the life of your spouse or a younger beneficiary. The key is to educate the beneficiary NOT to take the cash or funds immediately but to have the IRA rolled into a new IRA in his/her name. If you name your estate, in general, as the beneficiary of a retirement plan, that rollover and "stretch" IRA option is not available.
5. Consider beneficiary consequences. If you name multiple beneficiaries of a policy or plan, make sure each beneficiary gets a separate share. Do not name, for example, your eldest child as beneficiary, assuming that she will generously share the windfall with her siblings. And beware of leaving money to a special needs child, unless you create an appropriate trust. Being the beneficiary of insurance could disqualify this person from many valuable government benefits programs.
Here's your challenge -- and please don't delay. Right now, today, check with the trustees of all IRA and insurance policies to make sure you have updated and named the beneficiary you really want to receive the money! Changing beneficiaries is very simple, requiring only written notification -- and written confirmation -- from the trustee, custodian or insurance company; you do not need an attorney to make a beneficiary change.
But if your "estate" is complicated, you definitely want to get advice about your legal situation from an estate planning attorney in the state where you reside. There's too much money -- and too much emotion -- at stake to make a simple naming mistake. And you won't be around to correct it by the time the "mistake" is discovered! That's the Savage Truth.