How to Choose a Beneficiary

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Winter 2012-2013

Choosing who gets what after you’re gone can be a burdensome task. With proper planning, however, your desires for how your wealth should be distributed in the future may be realized. Lee Sorenson, Financial Planner for The Private Client Reserve, gives advice on how one can designate assets to specific beneficiaries and the potential implications of each decision. Although Sorenson and other U.S. Bank representatives don’t provide tax or legal advice, or draft legal documents, they can offer guidance on what items you should consider.


What are the first steps to designating beneficiaries?

Ask yourself three key questions:


  1. “Who should benefit from my estate?” Perhaps you want your spouse, children, grandchildren or a charity to be your beneficiary.
  2. “Of those people or entities, how much do I want each to receive?”
  3. “What is the best way to get it to them?

How can assets be designated to beneficiaries?

Typically, your will — and/or revocable living trust — dictates how your assets are distributed after death, but another method is through beneficiary designations.

Lee Sorenson; photo by David Bowman


You can designate specific beneficiaries for retirement accounts (401(k), IRAs, etc.), life insurance and annuity contracts. In addition, bank accounts can have “pay on death” or “transfer on death” designations.


But it’s also important to consider how an asset is owned. The titling of an asset can dictate where it goes after you pass away. For instance, if your house (or investment account) is owned by you and your spouse as “joint tenants with rights of survivorship,” when you die, your spouse will get that asset regardless of what your will says.

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Winter 2012-2013

What are the best ways to give to charities at death?

You can name a specific charity or foundation as the beneficiary in your will. You can also specify a dollar amount or a percentage of your estate, or donate a specific asset (e.g., real estate).


When clients have charitable intent and own assets such as a retirement account like a 401(k) or IRA, I always advise them to donate these assets to charity. The reason is that the charity won’t have to pay income tax on the distribution from accounts like an IRA, whereas individuals will, resulting in overall lower tax. The easiest method to donate these assets is to name the charity as a beneficiary of the account.


What are the benefits of naming a trust as a beneficiary?

Creating a trust allows you to determine how and when your heirs benefit from your estate after your death. For example, you could create a trust that distributes income — and some principal if needed — to your surviving spouse. Any principal remaining after the surviving spouse’s death can be distributed per your original intentions. This trust works well in a blended marriage.


Designating a trust as the beneficiary of assets intended for children and grandchildren can also be beneficial. Many parents name a trust as the contingent (or “secondary”) beneficiary for their estate, IRAs, 401(k) or insurance policies. So when both parents pass away, the trust can dictate how and when those assets are distributed to the next generation.

“Naming a contingent beneficiary is important because it helps ensure that the assets will transfer to those heirs you wish to benefit from your legacy.”—Lee Sorenson


What common mistakes do people make when designating their beneficiaries?

People forget to coordinate their beneficiary designations with their will. They may not realize that their beneficiary designations will supersede what their will says. For instance, if an individual’s children are designated as the primary beneficiaries on their IRA, but the will says to give the IRA to his or her spouse, the beneficiary designation for the IRA supersedes the will. The children would receive the IRA instead of the spouse.


Another mistake is not updating beneficiaries. For example, many individuals name their children as primary beneficiaries. But if one of the children pre-deceases them and the beneficiaries aren’t changed, many times the assets that would have been given to the deceased child are reallocated back to surviving children instead of being passed down to grandchildren. Updating beneficiaries at significant life events can be critical.


In addition, naming a contingent beneficiary is important because it helps ensure that the assets will transfer to those heirs you wish to benefit from your legacy.


Please see important information below.



Wealth Transfer