RCL Capital Management

A Certified Financial Advisor serving investors in greater Pittsburgh, Pennsylvania – Wexford, Cranberry, Marshall, Bradford Woods, Pine, Richland, McCandless, Ross – and beyond since 1997.

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Beneficiaries Matter

The names listed on your retirement account beneficiary forms are a matter of critical importance. Do you know why they matter? Do you even know who they are?

You would never intentionally distribute your IRA retirement assets to an ex-spouse, but you might be surprised how often this actually happens.  You also would not likely give all of your assets to one of your children while ignoring the heirs of the rest of your children.  Again, you might be surprised how often this takes place.  The reasons for the unintended distributions are generally the result of forgotten or neglected beneficiary designation forms. 

The assets within qualified plans and IRA's are not subject to probate and are not necessarily affected by a person's will.  These assets are distributed based on the terms of a person's beneficiary designation form.  Therefore, a person's beneficiary designation form is critically important.  Unfortunately, many people complete this form when they establish an IRA account but do not take the thirty seconds required periodically to assess the propriety of those named as beneficiaries.

Many people also assume that if they do not name a beneficiary that the assets will be distributed as part of the estate.  The result is that the assets now become subject to probate, which can be expensive and difficult.  These assets may also be required to be distributed within five years of the owner's death under the estate beneficiary approach whereas an individual named as the beneficiary can elect to have the IRA assets paid over their lifetime which results in a 'stretching' of the tax liability over their lifetime.  The easy solution is to make sure that your beneficiary designation form is up-to-date for all of your retirement accounts.

Naming a trust as a beneficiary is also a strategy used by many attorneys in the estate planning process.  Although there are legitimate reasons for doing so, a person should also be aware of the risks associated with this approach.  Unless the trust is structured as a 'look through,' the IRS requires that the assets be distributed within five years thereby negating the beneficiary's ability to stretch the tax liability over their lifetime.  The 'look through' provision allows the trust to �stretch� the trust over the lifetime of the oldest trust beneficiary.  Since charities, estates or other trusts do not have a defined life expectancy, they cannot be named as beneficiaries of a 'look through' trust. 

Another risk is that the costs to administer and maintain these legal documents can be expensive.  The additional costs will reduce the amount ultimately received by the named beneficiaries of the trust.  Finally, a trust becomes subject to the 35% income tax rate once the income exceeds $10,450 whereas an individual does not hit the 35% income tax rate until their income exceeds approximately $350,000.  The income tax implications of naming a trust as the beneficiary of your retirement plan assets should always be thoroughly evaluated.  Do not assume that because your attorney structured it this way that an analysis has been considered. 

Life changes will mean that the named beneficiaries that made sense at one point in time are completely unreasonable at a later point in your life.  Therefore, you should periodically verify who is a named beneficiary and ask yourself if that person or entity continues to be the appropriate beneficiary.