The Dos and Don'ts of Naming a Beneficiary

You’ve worked hard to create a good life but if you died tomorrow, who would inherit the spoils of your success for your retirement plan and IRA accounts? Do you know the risks of naming a minor as a beneficiary? Or what happens if you don’t name a beneficiary at all? Learn those things and more below.

Understanding Beneficiaries

A beneficiary is a person/people or entity (such as a trust, charity, etc.) that receives the death benefit payment when a retirement plan participant passes away.

First Choice: Your primary beneficiary can be one person or multiple people. They are first in line to receive this death benefit. The percentage interests of all primary beneficiaries must add up to 100%. If one primary beneficiary predeceases you, the other(s) will take their share.

Second Choice:
Your contingent beneficiary/beneficiaries will receive the death benefit if all primary beneficiaries predecease you. The percentage interests of all contingent beneficiaries must add up to 100%.

None of the above:
If you don't name an account beneficiary, there are a few possible routes for death benefits or account funds:

• The proceeds may go to your estate.
• A probate court may decide who will receive the funds, per your will, if you have one. It's worth noting that the probate process can be lengthy.
• A pre-determined order of beneficiaries may be used to determine who receives the funds. The death benefit will be paid as outlined in the certificate of coverage or governing plan documents. As an example, the benefit payment order may start with one’s spouse, then move on to children — or proceeds could be paid to your estate.

Either way, if you don't name your beneficiaries, or have a will, you don't get to decide who receives your assets.
 

Some Important Considerations 

1. Before you name a child as beneficiary know that most retirement plans won’t pay the proceeds to minors. Money will be paid to the guardian or surviving parent under the minor’s Social Security Number. Even if naming a minor is allowed, there may be additional court documentation needed.

2. Before you name someone with special needs as a beneficiary know that it could impact any government benefits he or she may currently receive. Consider consulting a legal advisor to create a special-needs trust that may help properly protect your beneficiary over the long-term.

3. Review your beneficiary list on a regular basis, especially after you have experienced an important life event like:

• marriage or divorce,
• childbirth or adoption, or
• the loss of a loved one