The SECURE Act has made this one question you want to know the answer to. Why? Because the sweeping changes just made to retirement in the SECURE Act have implications for those people or things you have chosen as your beneficiaries.
Let me share a story with you on the importance of knowing your beneficiaries-
In 2005 the New York Post published an article titled “Pension Pickle-Broke widower loses $1million to in-law.” The article states that in 2005 a Brooklyn man was left penniless when his late wife’s pension was inherited by his sister-in-law. Not only had he lost his wife to a sudden heart attack after 20 years of marriage, but he lost his entire inheritance on a technicality. How so? It turns out that the wife never updated the beneficiary on her pension plan after she married. She had chosen her mother, uncle, and sister as beneficiaries four years before she met her husband, but neglected to update the beneficiary to be her husband when they married. The husband has assumed he was the beneficiary, and argued that when annual statements were received, no beneficiary was mentioned. This lead him to assume as her closest relative, he would automatically be the beneficiary. Unfortunately, that was not the case. To make matters worse, the sister who was the sole living beneficiary of the three named beneficiaries was not interested in sharing the money.
In my experience, I have seen ex-spouses named as beneficiaries on more than one occasion. In most cases, the owner of the accounts has no intention of their ex-spouse receiving their assets, but unless a change is made to the beneficiary at the account level, their wishes will not matter.
Beneficiaries can come in several different forms.
Who you choose here has major financial implications in terms of how they inherit the asset you own. And having contingent beneficiaries for your assets is just as important.
Under the SECURE Act there are now 3 kinds of retirement plan beneficiaries for determining post-death payouts after 2019. These are-
1. Non-Designated Beneficiary (NDB)
2. Non-Eligible Designated Beneficiary (NEDB)
3. Eligible Designated Beneficiary (EDB)
These beneficiary designations matter for your 401k, 403b, 457, IRAs and Roth IRAs. Why does the type of beneficiary matter? Given the SECURE Act, how a beneficiary can withdraw the money in the inherited account may have changed. And it may have substantial tax implications.
An NDB is a non-person. This is a Trust or Charity. When you name one of these as your beneficiary, they must withdraw all money from an account by the end of the 5th year after death. There are more details here depending on whether or not the account owner was over age 72 at death, but biggest point here is that all money must be withdrawn within 5 years. This rule did not change under the SECURE Act.
An NEDB is a beneficiary who does not qualify as an EDB. These are grandchildren, adult children and some Trusts. There is a new rule here which states that retirement accounts inherited by NEDB’s must be payed out within 10 years of death. A beneficiary who is an NEDB can no longer stretch an inherited IRA over their lifetime, but instead must take all money out by 12/31 of the 10th year following death. This can have large tax consequences, so having a strategy here is important.
An EDB is a surviving spouse, minor children, disabled or chronically ill individuals, and those people not more than 10 years younger than the IRA owner. These beneficiaries are still able to stretch distributions over their lifetime, until they no longer qualify. The opportunity to stretch distributions is only temporary for minor children and goes away once they reach age of majority in their state.
For non retirement accounts, such as life insurance, and non qualified annuities, it is just as important to know your current beneficiaries, to have copies of the beneficiary forms, and to review these when there is a life change or tax law change.
Don’t assume that you know the beneficiary on an account. Double check it.
Find the documents that list the beneficiaries and keep them in one place for reference. Even if you are in a Community Property state, make it a point to name your spouse as beneficiary, and to name contingent beneficiaries. Every time there is a transition in life or change to tax law, it is important to revisit the beneficiaries for your accounts to make sure they are accurate.
If you’d like to learn more about how best to leave assets to beneficiaries based on tax consequences as a result of the SECURE Act, let us know.
