Once you meet the eligibility requirements for your employer’s retirement plan, you have the opportunity to start contributing toward your financial future. This milestone also ushers in a number of important decisions. There are the exciting choices such as how much to contribute, the selection of pretax or Roth deferrals, and how your money should be invested. There are also more sobering choices such as who should be designated as beneficiary when you pass away.
Saving with an eye on future goals can be fun. Thinking about your inevitable demise? Not so much. Still, that doesn’t mean this thinking and planning shouldn’t be done.
Selecting a beneficiary is somewhat like choosing a person to inherit something. When you complete a beneficiary form, you will be asked to designate at least two people who will respectively become your primary and contingent beneficiaries. While there is no requirement to name both, it’s a good idea. A primary beneficiary is just that - first. This is the person you want to receive the money you’ve saved in your retirement plan if something should happen to you. If you like, you can designate multiple primary beneficiaries and they will receive various percentages of your plan proceeds (as long as it all adds up to 100%). Or, you can name one person who receives 100% of the proceeds.
While you can name anyone as a primary beneficiary, there are some specific rules that apply to married plan participants. If you are married, the standard requirement is that your spouse becomes the primary beneficiary of 100% of your retirement plan proceeds. Because there are situations where you might want to choose a different primary beneficiary you are allowed to name a different individual or individuals, but only by providing proof of spousal consent.
A contingent beneficiary is a person who would inherit your plan assets if you and your primary beneficiary or beneficiaries pass away at the same time. Just like the primary beneficiary, you can name as many contingent beneficiaries as you would like; you just have to make sure the percentages all add up to 100%. One common way to do this is to name a spouse as the 100% primary beneficiary and then name all offspring as contingent beneficiaries in equal shares. Naming multiple beneficiaries can lead to unintended outcomes, so always consult with your advisor.
Unfortunately, naming children as beneficiaries brings all new challenges. While your children are still minors, they are not legally allowed to inherit your plan proceeds as direct beneficiaries.
We believe the best way to avoid this potential chaos is to set up a trust in the name of the minor child/children with a designated adult trustee that you choose. Creating a trust also allows you to dictate how old your child/children would have to be before they receive the money from your hard-earned savings. If you haven’t done so already, we recommend you seek out a qualified estate attorney to walk you through this process.
Finally, realize that beneficiary forms are legal documents that can be changed and need to change as your life changes. Over the course of your working years you may get married, divorced, or have children. People in your life – perhaps your beneficiaries - may pass away. Making sure that you account for these changes is in everyone’s best interest. Make it a standing “to do” to review your beneficiary form at least once a year.
Disclosure: The opinions and assumptions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. SYM-18-143