A Tax Fact from The Tax Institute at H&R Block

Keeping your records up-to-date
Financial stability for your family, both during your life and after you’re gone, is a key goal for nearly all investors. Don’t underestimate the importance of keeping designated beneficiaries up to date in your financial records. It’s an important factor in your overall financial legacy.

A common mistake investors make is thinking that an updated last will and testament overrides any prior beneficiary designations. This is not the case with retirement accounts, insurance policies, and some other financial accounts. You should review your designated beneficiaries for all of these entities at least once a year, or when a life change occurs. This is especially important if you have divorced, remarried or had children since you originally named beneficiaries for your life insurance and other financial accounts. Make any needed changes immediately after the review; don’t put them off.

Imagine your ex-wife receiving life insurance benefits that both you and your current wife thought she was to receive. Or the youngest of several children who doesn’t inherit her share of an annuity or retirement account because her parent inadvertently neglected to add her to the designated beneficiary list.

Retirement accounts
Retirement accounts normally pass automatically to one or more beneficiaries when you die, without going through probate. Federal regulations automatically designate the spouse as the beneficiary of qualified plans, such as profit-sharing plans and 401(k)s. If you wish to name a designated beneficiary other than your spouse, he or she may be required to sign a document acknowledging this.

State law determines how IRAs are handled. If you neglect to name an IRA beneficiary, then your IRA is likely to go through probate, which can be lengthy and costly. You may want to find out if your IRA plan provides default beneficiary options in case a named beneficiary predeceases you. That default beneficiary may not be the one you would choose. For example, you name your three children as beneficiaries, but a daughter predeceases you. The plan may disregard the deceased daughter and distribute only to the two living daughters, but you may want the deceased daughter’s share to be distributed to her children upon your death. Unless you take the steps necessary to ensure that your wishes are fulfilled, you are at the mercy of your plan’s default provisions.

Life insurance
Life insurance proceeds also pass outside of probate to your designated beneficiaries. As with retirement accounts, it’s important how you name your beneficiaries. For instance, naming “children of the insured” as beneficiaries may exclude step children or adopted children. With today’s blended families, it becomes even more important to specify to whom and how your assets are to be distributed. Again, you may want to explore default beneficiary options in the event that a named beneficiary predeceases you. All it takes is updating the proper forms.

Real estate
Do you own a home or property? If the answer is yes, then you may want to consider a beneficiary deed. A beneficiary deed determines who will receive your real estate property after your death and allows for a smooth transition between you and your designated beneficiary.

The beneficiary deed must be completed before you die, and will be re-titled in your designated beneficiary’s name. But don’t fret; as the original owner, you do not relinquish your rights to the property until your death.  During your lifetime you can re-direct the beneficiary deed to someone else, however, you will need to obtain a recorded revocation before creating a new beneficiary deed in order for the new beneficiary to be recognized.

It is always wise to check with your attorney before proceeding with a beneficiary deed as laws for beneficiary deeds vary state to state. 

Review, review
It pays to review your retirement plan, life insurance policy, and other financial accounts to ensure that your assets will be directed where you intend them to go. Talk to your financial advisor about designating beneficiaries for your investments or reviewing your current plans to minimize costly tax implications.

This Tax Fact is brought to you by The Tax Institute at H&R Block. 

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.