Choosing beneficiaries for your retirement accounts
Though saving as much as possible in your retirement account is important, do not lose sight of one of the most important financial decisions you will make: determining the beneficiaries of your account. Without careful consideration, your decision may have unexpected tax and estate planning implications.
The beneficiary designated on any retirement account typically supersedes the instructions found in a will or a trust. Understand that not all beneficiaries are treated alike. When choosing your beneficiaries, you should know the options that are available to them when they inherit your retirement account. This is a brief introduction to some typical beneficiary designations. Naming beneficiaries for your retirement accounts is an important first step in your estate planning. This is a general guide and is not meant to replace legal counsel. Please consult with an attorney if you have questions regarding beneficiary designations on your account.
Naming primary beneficiaries and contingent beneficiaries
Your primary beneficiaries will be entitled to receive any undistributed assets in your account following your death. They will share equally in your account unless you specify different percentages. If a beneficiary predeceases you, his or her share of your account shall be divided proportionately among the surviving beneficiaries.
Your contingent beneficiaries will be entitled to receive any undistributed assets in your account only if you have no surviving primary beneficiaries at the time of your death. If there are no surviving primary beneficiaries, your contingent beneficiaries will share equally in your account unless you specify different percentages (see example).
Your spouse as primary beneficiary
Most people voluntarily name their spouse as their primary beneficiary. Spousal beneficiaries have the greatest flexibility regarding distribution options. They can keep the account with WEA Member Benefits, liquidate all or part of the account, or they can roll the account over to their own retirement plan or IRA account. Rolling it over may be advantageous if your spouse is younger than you, as your spouse may defer receiving distributions until his or her own required distribution date. In Wisconsin, you are not required to name your spouse as a beneficiary of your 403(b). However, since Wisconsin is a marital property state, your spouse could claim their right to 50% of your account.
Naming someone other than your spouse
You may name anyone as a beneficiary of your account. Although spousal beneficiaries have the most flexibility with an inherited retirement account, for many reasons you might find it more appropriate to name someone other than your spouse as your primary beneficiary or as your contingent beneficiary. A person other than your spouse may take the entire distribution (liquidating the account) or “stretch” the distributions over his or her own life expectancy. Stretching the account allows the beneficiary to maintain the tax-deferred and/or tax-free status of the account throughout their lifetime.
WEA Member Benefits allows beneficiaries to stretch distributions over their lifetime unless otherwise requested.
Naming a trust
Although a trust may not have the flexibility available to the spouse and other persons, naming a trust can give you more control over your assets after you have passed away. The trust must be set up before naming the trust as beneficiary. Assets in your 403(b) account will be distributed to the trust no later than the year following the year of your death. The administrator of the trust then distributes the assets according to the trust directions. If a trust is set up under very specific rules, the beneficiaries of the trust may be eligible for the same treatment as a spouse and other individuals. These requirements can be very complicated. You should consult with a qualified advisor before naming a trust as beneficiary.
Naming a charity
If you have already provided for your heirs and you have charitable inclinations, naming a charity is an option for you. Generally, pre-tax 403(b)s are subject to tax on all distributions. However, an exception may apply to direct distributions to qualified charities.
Naming your estate
WEA Member Benefits generally discourages participants from naming their estate as a beneficiary on 403(b) accounts as this produces unfavorable distribution options and makes your retirement funds subject to probate. Probate assets are all assets included in your estate that do not have named beneficiaries. The probate process can be an expensive and time-consuming process. If you fail to name a beneficiary on your account, your account will be paid to your estate or according to your school plan documents.
Review your beneficiary designations annually
As you experience changes in your life, do not forget to review your beneficiary designations. Remember, your beneficiary designations take precedence over your will. Many people fail to change their beneficiaries after a marriage or divorce. Be sure to review your designations annually to ensure they are current and in line with your intentions. You may want to consult your attorney to ensure that you understand all aspects of your decision.
Follow this link for important 403(b) disclosures.