Generally, you only have a beneficiary designation for tax-deferred assets such as your IRA and your 401k. Your home and general brokerage account most often do not have these designations. When tax-deferred assets are inherited, there is typically a tax-beneficial payout schedule that applies to the beneficiaries. In order for the beneficiaries to receive this favorable payout schedule, they need to be specifically named as the beneficiary. An IRA that is just left to the account holder’s estate or Will may be deemed to not be inherited by a person, and therefore a less tax-advantageous payout schedule is employed. This translates to less tax-savings.
You can have a beneficiary designation with your brokerage account if you like. This is often called a “Transfer on Death” assignment. Account holders like to do this because the account transfers quickly at their death and avoids the probate process. However, this type of designation on a non-tax-deferred account doesn’t garner any special tax considerations. Because there is no tax benefit to naming beneficiaries on these types of accounts you may want your non-tax-deferred assets to flow to the estate so that your Will states clearly who is to receive the assets.
If you have any major life changes, you should consider updating your beneficiary designations. This should include a review of your life insurance policies and beneficiaries. A marriage, the birth of a child, or loss of a loved one is a reason to ensure that your assets as assigned to be inherited by the correct parties. Even without a major life change, a review of beneficiaries is practical every 3 to 5 years.
Harli Palme, CFA, CFP®
Chief Operating Officer, Chief Compliance Officer
