'Tis the season to bond with loved ones -- to sip hot toddies by
the fire and hope that none of your regifts are recognizable to
this year's recipient.
As long as you're filling out gift tags and place cards -- and
before visiting family members start getting on your nerves -- it's
a good time to check and see whether you've jotted down the right
names on your beneficiary forms.
Drudgery? Yeah, sure. But if you really need a break from the
"family dynamics" for a while, updating your beneficiary forms is
an awesome excuse for why you disappeared for a few hours.
Which accounts need beneficiary designations?
Any assets disbursed outside a will or not accounted for in a trust
require a beneficiary designation. That list includes common kinds
of accounts we all have, such as:
IRAs, 401(k)s, 403(b)s, 457s, pensions, and self-employment
retirement plans (e.g., Keoghs).
Credit unions, checking accounts, and savings accounts.
Disability and life insurance policies.
Annuities and financial services products.
If you haven't checked on your beneficiary form designations
lately -- and particularly if you've gotten married, unmarried, had
kids, lost a spouse, etc. -- put this on your must-do list.
Who wants my stuff when I die!?
Before you dash off your spouse's name, or put Junior's Social
Security number on the dotted line, make sure you're not making any
of these mistakes:
Assuming your will is going to take care of all the
trump what's in a will. These documents must be consistent with
one another: If you set up a trust, designate the trust as the
beneficiary, not the person you named in the trust to inherit the
Subjecting your heirs to an avoidable tax bill.
Failing to name beneficiaries on your IRA (or consigning it to
your estate) risks robbing your heirs of the ability to maintain
tax-advantaged growth over their lifetime (via a stretch IRA).
Without a beneficiary, your IRA money will go through probate,
and your family (excluding spouses) will typically be required to
withdraw the money within five years. Most beneficiaries don't
even wait that long: They take hold of the entire IRA at once.
Doing so not only incurs an immediate tax bill, but also subjects
all subsequent earnings and capital gains to income taxes. On a
$100,000 inheritance earning $5,000 a year, anyone in the 25% tax
bracket just bought themselves an annual tax bill of $1,250.
Forgetting to update forms when life happens.
Just as bad as failing to name a beneficiary is not updating
designations when beneficiaries marry, divorce, come of age, or
tick you off. That's how exes and bitter sisters-in-law strike it
Not having a plan B.
If your primary beneficiary isn't around to collect, and no
secondary beneficiary is named, the court decides who gets the
dough. Be exact. You can name multiple primary and secondary
beneficiaries, so don't be afraid to spell out how you want your
Naming minor children as beneficiaries.
Until age 18 or 21 (depending on state laws), minors can only
inherit limited amounts. Designate a financial guardian or set up
a trust for the kiddos. Either should have detailed directions on
how to manage the windfall until the children are of age.
The best thing about updating your beneficiary forms is that
once you're done all those annoying things your family's doing in
the other don't seem like such a big deal after all.
As long as you're making lists and checking things twice, here
Taking care of paperwork is just one of the things you need
to do to protect your assets in retirement and beyond. To learn
to read the Fool's new special report,
The 7 Secrets to Salvage Your Retirement
needs a break from party chaos, she clears her place and
excuses herself to go wash the dishes. Which is sometimes awkward
for restaurant staff. When you get a free moment, the Fool's
is ready for the check.