The decision about how to designate beneficiaries for your company retirement plan, life insurance policies, and other assets might seem like a no-brainer. Chances are you would like those near and dear to you to inherit any money you've accumulated during your lifetime, so making sure that happens should be as simple as writing their names on the appropriate forms, right?
Not so fast. Naming beneficiaries is a more nuanced decision-making process than you might think, and it's one that may have significant repercussions for your loved ones.
In this article, I'll provide some pointers to bear in mind as you review your beneficiary designations.
1. Know the basics
You can typically name beneficiaries for a broad range of assets,
including retirement plans, annuities, and life insurance policies. And
you can name almost anyone--or anything--as your beneficiary, including
individuals, charities, and trusts. (Children under the age of
majority--age 18--cannot be named as beneficiaries of life insurance
policies, retirement plans, or annuities, however.)
When you name a beneficiary, those assets can pass directly to whomever you designate. In addition, bear in mind that your beneficiary designations may override bequests you've made in your will. For example, even though your will might state that you want your spouse to inherit all of your assets, your brother will get a piece of the pie if you named him as the beneficiary of your company retirement plan and didn't bother to change it after you got married.
2. Keep your designations up to date
That brings me to my next point: Plan to review your beneficiary
designations on a regular schedule, ideally as part of an annual review
of your finances. Major life events, such as a marriage, a divorce, the
birth of a child, or the death of a loved one may require that you make
changes to your designations. By the same token, you'll also want to
review your beneficiary designations if you or your employer has
recently switched retirement-plan or insurance providers, as the
beneficiaries you specified with your previous provider may not
automatically carry over to the new one.
3. Bear in mind the tax consequences
Before you make your beneficiary designations, be aware that inheriting
assets is apt to have tax ramifications for your loved ones. (That's not
the case if you name a charity as your beneficiary, however. All UK
charities are exempt from inheritance taxation.) If you're making
someone other than your spouse the beneficiary of your company
retirement-plan assets, he or she may have to take mandatory
distributions from that plan and, in turn, pay taxes on the money. Your
spouse, on the other hand, will be able to roll over your
retirement-plan assets into his or her own pension policy and won't have
to pay taxes until distributions begin. This tax exemption is limited to
£55,000 if the deceased (or donor) was domiciled in the UK and their
spouse or civil partner was not domiciled in the UK at the time of the
transfer.
Also keep inheritance taxes in mind: If you designate someone other than your spouse as your beneficiary, that amount will be included in the value of your estate, and, in turn, could increase your estate-tax liability. And if your beneficiary already has a large amount of assets, you could end up creating an estate-planning headache for him or her, or compounding an existing one. That's because any inherited assets will be included in that person's estate, and if the taxable estate is above a certain threshold (£325,000 in 2009-10) at the time of his or her death, his or her heirs will owe inheritance tax. Again, these issues usually don't pertain to husbands and wives, as a spouse won't owe inheritance tax on assets inherited from another spouse, provided their permanent residence is in the UK. The surviving spouse's heirs may well owe inheritance tax at the time of his or her death, however.
For all of these reasons, it pays to discuss these considerations with your loved ones before you name them as your beneficiaries.
4. Be specific
If you have a particularly trusted friend or relative, it may be
tempting to name him or her as your beneficiary with the assumption that
that person would "know" how to distribute your assets in accordance
with your wishes. For example, you might want to name your financially
savvy brother as your beneficiary of your retirement plan; he, in turn,
could distribute your assets to each of your siblings.
I'd advise against this tack, however. For one thing, there's the possibility that person won't know precisely how you'd want those assets distributed or could decide to keep it all for himself. Perhaps more importantly, you could create or compound estate-planning issues for that person. Even if that individual ends up distributing the inherited assets to others, those assets will still be considered part of that person's estate when he or she passes away.
For all of these reasons, it pays to be as specific as possible when designating beneficiaries. Most beneficiary designation forms allow you to name multiple primary and contingent beneficiaries and to specify what percentage of assets you'd like distributed to each person upon your death.
5. Give special consideration to special-needs loved ones
I have a special-needs person in my life, so I can relate to the desire
to make sure that any physically or mentally disabled loved ones are
well provided for. Remember, however, that you could affect the disabled
individual's eligibility for government-provided benefits by
transferring assets directly to him or her. In addition, if the person
is mentally disabled, he or she may not be able to manage the assets.
If you're in a position to transfer a large amount of assets to a loved one with special needs, consult with a solicitor who specialises in inheritance planning first. He or she may recommend that you set up a Special Needs Trust.
6. Familiarise yourself with other aspects of inheritance planning
Although you might associate the need for "inheritance planning" with
the mega-rich, designating beneficiaries is actually one of the first
steps in creating an inheritance plan; creating a will is another.
Moreover, you don't have to consider yourself extremely wealthy to
contemplate setting up a trust.
