The process of distributing your assets to family and loved ones after your death can be a complicated (and occasionally confusing) aspect of estate planning. Wills and trusts are the primary estate planning vehicles for outlining who should receive your assets and how, but the proper use of beneficiary designations can further streamline the asset distribution process.

A beneficiary designation allows certain assets to be passed on to specific individuals after the original owner passes. The types of assets that qualify for beneficiary designations include bank accounts, annuities, retirement accounts, and life insurance policies. When used properly, beneficiary designations allow assets to pass from an owner to a beneficiary, outside of a Will or Trust, while bypassing the often painful probate process. However, beneficiary designations particular to retirement accounts (such as an IRA or 401k) are governed by a  complex series of rules dictated by legislation from 2019, known as the Setting Every Community Up for Retirement (SECURE) Act. This act narrowed the prior criteria for using a beneficiary designation on retirement assets.

Who Can Qualify as a Designated Beneficiary Under the SECURE ACT?

When beneficiary designations have been set up properly, certain assets can be transferred directly to a specific individual after the original owner’s death, no probate needed. The owner of these assets can designate more than one primary beneficiary, as well as one or more secondary beneficiaries, if they so choose. However, not all beneficiaries are created equal…

The SECURE Act divides all potential beneficiaries of retirement assets into three categories: eligible designated beneficiaries (EDBs), designated beneficiaries, and non-designated beneficiaries, with each subject to varying terms and conditions.

EDBs are a special group of individuals that include the following:

    1. The owner’s surviving spouse
    2. The owner’s child under 18 years of age
    3. A disabled person
    4. A chronically ill person
    5. Any other person who is not more than 10 years younger than the owner

All other individuals qualify as regular designated beneficiaries, while non-human entities—such as trusts, estates, and charities—are classified as non-designated beneficiaries. The chief difference between EDBs and regular designated beneficiaries is that the latter must withdraw the remaining balance of any account within 10 years of the participant’s death. The account title held by EDBs allows them exemption from the 10-year rule, and such individuals can withdraw from the inherited accounts over the course of their lifetimes. Non-designated beneficiaries are subject to the same regulations as regular designated beneficiaries except that such non-designated beneficiaries must withdraw the remaining balance within 5 years of the participant’s death.

Advantages of Beneficiary Designations

Beneficiary designations are a great way to ensure the smooth transition of retirement accounts, to family members and loved ones. This arrangement not only avoids any confusion when it comes time to distribute your assets, but it allows you to avoid probate by transferring these assets directly to your intended beneficiaries. It’s important to note that a beneficiary designation will supersede a named beneficiary in a will or trust. For example, if your sister—who you have had a major falling out with—has been removed from your will, but is still named as the designated beneficiary on your retirement accounts…she will receive ownership of those accounts when you pass away, whether you want her to or not.

Beneficiary designations can be a very useful tool in planning your estate, but the complexity of how these various estate planning tools all work together does lend itself to hiring a qualified attorney to oversee the process. The harsh reality is that many account owners don’t understand these rules set forth under the SECURE Act when designating beneficiaries, often jeopardizing their estate plan and potentially causing a hefty tax assessment upon death.

At Caress Law, we know all the intricacies of the process—from wills and trusts to beneficiary designations and beyond, we can help you navigate the complex process of estate planning, so your final wishes can be executed, without question. To learn more, listen to our podcast on the subject, or contact us today.

Contact Caress Law, PC

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