Part two on beneficiary designations


By Randy Neumann

Last week’s column was about beneficiaries on a life insurance policy. This column is about other types of beneficiaries.

Let’s begin with “qualified” retirement plans. Qualified means that the plan meets the government standards; therefore, it receives (in most cases) a deduction on the contributions and a deferral of earnings until withdrawals are taken. Most of these plans begin with the letter P —pension plans, profit-sharing plans, etc. or with the number 4—401(k), 403 (b), etc.

Last week, I received a phone call from an employee of a company for which we recently set up a 401(k) plan. She asked me if she could name her daughter as a contingent beneficiary. I told her that she could, but that it would not be a good idea. A contingent beneficiary is the person who will receive the benefit if the primary beneficiary is deceased. While it is always a good idea to name a contingent or secondary beneficiary, it is not a good idea to name a minor.

A minor, in New Jersey, is anyone younger than age 18. The reason you do not want to name a minor as a beneficiary to a retirement plan is that the legal system will not allow them to receive the money. You can name a minor if you have a trust or guardianship set up, neither of which is fun or cheap. If you have neither, the legal system will keep and manage the money until the child is 18 years old. Need I say more?

Another thing to avoid is using your will as a beneficiary form. As an example, let’s say that two years ago, after your divorce, you named your daughter as the beneficiary of your company retirement plan in the new will you had drawn up.

Unfortunately, a beneficiary designation in a retirement plan precedes anything that is distributed by a will, so the ex-spouse you named as the beneficiary of your retirement plan in 1992 will receive the money in the event of your demise. That’s right, so scramble around right now, and check all of your beneficiary designations!

Normally, people name their spouses as the beneficiary of their retirement plan for two reasons. Number one, if you don’t name your spouse, you need written permission from them to name someone else. Number two, spouses receive an additional benefit to being a beneficiary than do other people.

Only a spouse can treat an inherited qualified plan as if it were their own, everyone else gets to treat them as being inherited. So what’s the difference? Here are examples:

Mama is the beneficiary of papa’s qualified retirement plan. If papa was not 70 1/2 years old and not taking Required Minimum Distributions (RMDs), mama can rollover the proceeds into her own IRA and not take RMDs until she becomes 70 1/2. Everyone else must treat the proceeds as an inherited IRA and begin making withdrawals based on their life expectancy.

But don’t complain! Up until a few years ago, you had the choice of cashing in the account at the death of the owner and paying the taxes, or waiting five years to cash in and pay the taxes. Under the new rules, if the money is taken out based on life expectancy, a 30-year-old would be required to take an RMD of $1,904 on an inherited IRA with a market value of $100,000, or just $9,578 out of a $500,000 IRA.

Now that we’ve shown the clear advantage a spouse has in inheriting a qualified plan, let’s get to the other options everyone has.

You can withdraw the assets as a lump sum. Uncle Sam would love this. He would get all of the taxes due on your regular income plus whatever you inherited. Don’t forget, we have a progressive tax system, so the more you earn, the more you pay.

You could also disclaim some or all of your inheritance within nine months of the original account holder’s death. Why would you do this? Well, if you don’t need the money, you could disclaim some or all of it and let it flow to the contingent beneficiary.

When you disclaim, the law deems you dead, therefore you cannot “steer” the money, i.e., and direct who should receive it, but, since you know who the contingent beneficiary is, you know who will get it. Again, naming beneficiaries is very important.

Lastly, you may be able to leave the assets in the retirement plan.

This option is seldom chosen, but it can be an option. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann, CFP® is a registered representative with and securities and insurance offered through LPL Financial. Member FINRA/ SIPC. He can be reached at 600 East Crescent Avenue, Suite 104, Upper Saddle River, NJ 07458, 201-291-9000.

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