Life Support - Tax Facts
The Importance of Beneficiary Designation
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. Particularly if you have divorced, remarried or had children since you originally named beneficiaries for your life insurance and other financial accounts, you should review and possibly change your designated beneficiaries for all of these entities.
Imagine a first wife receiving benefits that a second wife thought she was to receive. Or the youngest of several children who doesn't inherit her share of an annuity or retirement account settlement because her parent inadvertently neglected to add her to the designated beneficiary list after she was born.
Retirement Accounts
Retirement accounts are not part of the estate and normally pass automatically to your beneficiary 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 your estate and probate, which can be lengthy and costly. You may want to find out if your IRA plan documents provide default beneficiary options, in the case that a named beneficiary predeceases you. For example, you name your three children as beneficiaries, but a daughter predeceases you. You may stipulate that her one-third share would be distributed to her children upon your death.
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.
It pays to do a review of 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.
Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.
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.
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. Particularly if you have divorced, remarried or had children since you originally named beneficiaries for your life insurance and other financial accounts, you should review and possibly change your designated beneficiaries for all of these entities.
Imagine a first wife receiving benefits that a second wife thought she was to receive. Or the youngest of several children who doesn't inherit her share of an annuity or retirement account settlement because her parent inadvertently neglected to add her to the designated beneficiary list after she was born.
Retirement Accounts
Retirement accounts are not part of the estate and normally pass automatically to your beneficiary 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 your estate and probate, which can be lengthy and costly. You may want to find out if your IRA plan documents provide default beneficiary options, in the case that a named beneficiary predeceases you. For example, you name your three children as beneficiaries, but a daughter predeceases you. You may stipulate that her one-third share would be distributed to her children upon your death.
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.
It pays to do a review of 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.
Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. This material is not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.
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.
