Jim Senkbeil

A critical and sometimes overlooked aspect of a comprehensive financial plan is naming the beneficiaries of pension plan accounts, IRAs, and insurance policies. Each type of account or contract can present unique tax and legal consequences. Let's sort through some of the considerations surrounding beneficiary designations.

The rules affecting pension plan beneficiaries may vary by employer and by the payout option the employee selects. In general, however, tax law requires that a spouse be the primary beneficiary of a company pension plan unless he or she waives that right in writing. A waiver may make sense in the case of a second marriage, especially if the new spouse is financially secure. Single account holders can name whomever they'd like as beneficiary, however non-spouse beneficiaries are not allowed to roll the assets into an IRA or other qualified retirement plan.

IRAs have more flexible beneficiary rules ‹ virtually anyone can be named as beneficiary, even a trust under certain circumstances. If the beneficiary is a surviving spouse, he or she may treat the departed spouse's IRA as his or her own, rolling the unused portion into a new IRA, continuing the tax deferral, and taking annual required minimum distributions based on his or her single life expectancy.

In general, non-spouse beneficiaries can withdraw inherited IRA money using their own life expectancy. When there is more than one beneficiary, the IRA can be divided equally into separate IRAs. Each beneficiary could then withdraw money based on his or her life expectancy. Withdrawals for a surviving spouse or non-spouse beneficiaries will be taxed at then-current rates. In addition, early withdrawals prior to age 59 1/2 may be subject to a 10 percent penalty tax.

Regardless of who may be named beneficiary of an insurance policy, he, she, or they will receive the death benefit proceeds income tax free. For most married couples, a spouse will be the logical beneficiary. In some instances, particularly when there are certain estate planning goals, or if the spouse does not have the time, interest, or knowledge to manage a substantial sum of money, a trust may be a better beneficiary choice. Depending on your goals, a trust can be managed by you, your spouse, a relative, a trusted advisor, or a legal entity. Also, in many cases, co-trustees are named to provide greater flexibility and decision making continuity.

When naming beneficiaries to insurance policies, be sure to indicate secondary, or contingent, beneficiaries as well. Unnamed beneficiaries are typically assumed to be the øestate of the insured,Ó which means the death benefits must pass through probate and are ultimately distributed according to the decedent's will. If an individual dies intestate (without a will), then the order of legal beneficiaries to whom assets are distributed is specified by the appropriate state law.

Avoid Naming Minor Children as Beneficiaries Generally, pension plans, IRAs, and insurance policies will not pay death benefits directly to minors. Instead, a child's guardian will eventually receive the proceeds on the minor's behalf. The key here is øeventually.Ó To make the process of receiving proceeds a smooth one, consider naming a child's guardian or a trust (set up for the benefit of your children) as beneficiary.

Be sure to revisit your beneficiary designations each year as part of your overall financial review. Any changes to your life may be significant enough to affect your current choice of beneficiaries.

For example, did you get married or have a child during the past year? Did you get divorced? Did a loved one pass away? Maybe one of your children got married. Or, perhaps you've become a grandparent.

Each of these events ‹ and others like them ‹ will probably require you to take action. Use your annual review time to reevaluate and enhance each of your strategies for pursuing all-around financial well being, including your beneficiary designations. Finally, be aware that there may be tax and/or legal consequences associated with naming certain beneficiaries. That's why it is important to consult a qualified legal and/or tax professional to ensure your beneficiary designations are in accord with your overall planning intentions.

Jim Senkbeil is Director of Financial Services at Moore Colson, an Atlanta based certified public accounting and consulting firm. He can be contacted at 770-989-0028.