Naming Your Beneficiary
In the old days, choosing a beneficiary of your retirement accounts or annuities was a simple matter. The husband named the wife as beneficiary, and the wife named the husband as beneficiary. The children were typically named as successor beneficiaries who received the retirement benefits if both spouses were gone. This was the typical pattern because it met the needs of the traditional family. It would be fair to say that there are more families today that are nontraditional.
Because divorces and remarriages are common today, choosing a beneficiary of your retirement or annuity plans may require balancing the security you want to provide your current spouse with the needs of your children from a former marriage. Don't feel pressured to name your spouse as the beneficiary, especially if you have children from a former marriage. Remember, this is your decision to make.
For instance, you may decide to name your children from a former marriage as beneficiaries of your retirement plan and provide for your current spouse with other property. In order to decide what is best for your family, you need to understand the rules about naming your spouse as the beneficiary of your retirement plan as opposed to naming someone else, such as your children.
Naming Your Spouse as Beneficiary
When you name your spouse as the beneficiary of your IRA, your spouse has two options: She can transfer the balance of your IRA into a new IRA or into her existing IRA, or she can assume your IRA; that is, take over as owner of the IRA under the same rules established when you were living.
If your spouse transfers your IRA either into a new IRA or into her existing IRA, she will be able to change the successor beneficiaries. For example, suppose that you name your spouse as your primary beneficiary, and your children from a former marriage as your successor beneficiaries so that they will receive the IRA after your spouse is gone. Upon your death, your spouse could change the successor beneficiaries to someone you did not choose. Your children from a former marriage might discover after the death of your spouse that they will not receive the remaining retirement benefits you worked so hard to accumulate and had intended for them.
The second election your spouse can make is to assume your existing IRA. If this happens, your spouse's age in the year after your death will determine how rapidly she must withdraw from your IRA. The advantage of having your spouse assume your IRA is that the persons you name as successor beneficiaries will receive the remaining balance after your spouse is gone.
Understanding the elections your spouse has is easier today than it was a few years ago, but it is still tricky. You may want to consult with a financial professional to decide the best choice for you and your family. As you can see, there are several options for transferring IRAs, and many decisions that your spouse must make after your death.
Of course, it is much easier when you have been married to only one person and any children you may have are from that marriage. Then, you almost always name your spouse as the beneficiary and your children as the successor beneficiaries.
Naming Nonspouse Beneficiaries
If you have children and no spouse, you probably will name your children as the beneficiaries of your IRAs and annuities. Even if you have a spouse, you may still decide to name your children as the primary beneficiaries. You might make this choice either because this is a second marriage, or you and your spouse or partner have evaluated all of your property and determined that your family unit can save taxes this way.
If you have no spouse or children, you will need to choose someone or some entity such as a charity as the beneficiary. There are no limits on who you can name. However, your choice of beneficiary may affect the way your IRA or annuity will be taxed.
Unmarried partners are more common today and it is important for you, if you are in this situation, to look carefully at your assets, how they are titled, and how they are directed. If you want your partner to be the beneficiary of your retirement funds, be sure your beneficiary designation form clearly names her.