Make Sure Your Assets Go To Intended Beneficiaries

Q.: I just joined a company that offers a 401(k) plan. In looking over the material, I noticed a “beneficiary designation” form. What, exactly, is that?

A.: A beneficiary designation is a document that identifies who is to receive the proceeds of the 401(k) upon your death. Life insurance, individual retirement accounts and other qualified plans proceeds also pass according to a beneficiary designation. Most beneficiary designations allow the owner to select a primary beneficiary and a contingent beneficiary. The primary beneficiary receives the proceeds upon the death of the owner. The contingent beneficiary receives the proceeds if the primary beneficiary is not living.

Q.: Who can be named as a beneficiary on a beneficiary designation?

A.: Generally, there are no restrictions on who can be named as a beneficiary. Most commonly, people name one or more individuals including a spouse or children, a trust, or a charity.

Q.: I recently remarried and updated my will to leave everything that I own to my current spouse. Years ago, I signed a beneficiary designation for my 401(k) and designated my former spouse as the primary beneficiary. Should I update that beneficiary designation to match my new will?

A.: Yes. It is important to understand that a beneficiary designation overrides wills, trusts, and other estate planning documents. If there is conflict between a beneficiary designation and a will, the beneficiary designation prevails. In your case, even though you have updated your will, if you fail to update the beneficiary designation for your 401(k), your former spouse will receive the proceeds of your 401(k) upon your death.

Q.: Are there any tax problems that can arise if I fail to complete or update a beneficiary designation?

A.: Yes. There can be a multitude of tax problems and it is wise to consult a tax professional regarding the proper completion of a beneficiary designation. For example, a common tax problem is having life insurance proceeds payable to your estate. Life insurance proceeds pass free of Ohio estate tax to beneficiaries other than your estate. However, if you fail to name a beneficiary on your beneficiary designation or if all of the beneficiaries that you name have predeceased you, the life insurance proceeds will be paid to your estate and will be subject to Ohio estate tax.

The information contained herein is general and should not be applied to specific legal problems without first consulting with one of our attorneys.

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