Broker Check

Do You Know Who is Inheriting Your Most Valuable Asset?

October 28, 2023

As we navigate the complexities of life—raising families, building careers, and nurturing social connections—certain responsibilities may inadvertently slip through the cracks. In emphasizing the importance of continuous financial and estate planning endeavors, I often refer to these aspects as the 'silent ones.' Unlike issues that clamor for immediate attention, these aspects don't make noise, bleed, or visibly deteriorate, making them easy to overlook.

Occasionally, we hear about celebrities passing away without a will, or leaving former spouses as the primary beneficiaries of their substantial estates, leaving their immediate family in dire financial straits. While your net worth may not rival that of a celebrity like Michael Jackson, it remains crucial to ensure that your most valuable assets—such as 401(k)s, IRAs, primary residences, and bank accounts—have designated beneficiaries appropriately registered.

While the array of assets individuals own is vast and diverse, this discussion will focus on one critical aspect—the beneficiaries of retirement accounts. Over the course of long-term employment, beneficiary designations in qualified plans, like 401(k)s or 403(b)s, may remain unchanged from the day the account was opened. Despite life events such as marriage, divorce, and remarriage, these designations may go unaltered. Another common scenario involves old IRAs from previous employments, rolled over from 401(k)s, that are currently held at various custodians, hence making them difficult to track and manage.

While most advisors routinely review beneficiary designations as part of their annual assessments, individuals and families without advisory support may need to scrutinize who stands to inherit their assets.

Now, let's delve into some strategic planning tips concerning beneficiaries. Recent tax law changes stipulate that non-spousal beneficiaries, inheriting retirement accounts, such as IRAs and Roth IRAs, have up to 10 years after the owner's death to withdraw the account balance. While distributions can be spread over the decade, the assets must be fully distributed by the end of the tenth year following the year of death. This could pose a significant tax burden for beneficiaries in higher tax brackets who don't require immediate funds.

In response, planning strategies can be applied: considering lower-income individuals to receive qualified and tax-deferred accounts, while higher-income individuals may receive non-qualified and taxable assets. Implementation may be intricate, but it serves as a valuable starting point for discussions.

Achieving equity among various scenarios and mitigating the impact of inheritance on intended beneficiaries is challenging. However, meticulous planning and collaborative efforts with professionals such as accountants and estate planning attorneys may help realize desired outcomes.

But first, we must make sure that the correct beneficiaries stand to inherit some of your most valuable assets.