Listing beneficiaries on retirement accounts can help heirs avoid large tax bills

Aunt Lilly was not known for her kindness or thoughtful nature. She had a tendency to knit, loudly, when she was sad, and given her propensity toward ennui, she knit quite a bit. Aunt Lilly had been kindly asked to leave quite a few functions, weddings, 4th of July cookouts, even funerals, by folks who weren’t in tune with her emotionally charged hobby.
Known for her frugal nature, it was no surprise then that when Aunt Lilly passed away, accounts stuffed with years of accumulated wealth began surfacing, each its own puzzle for her executor to decipher.
Aunt Lilly and her story serve as a cautionary tale when it comes to carefully selecting beneficiaries on accounts prior to death, as Aunt Lilly had chosen none.

Will it even matter?
Lilly’s husband had passed away two years prior in an elephant hunt gone horribly awry, and her sole remaining family member to whom she wished all of her assets go at her death was her nephew, Nathan. She didn’t consider her niece, Amanda, a family member any longer after many heated and ongoing disagreements.
All of Lilly’s assets should go through her will to establish who will receive the assets, and if Lilly has no will clearly stating Nathan as the sole beneficiary of her carnival glass collection, then the state may find that her estranged niece should share equal ownership of the bric a brac.
If she does have a will and intends for her accounts and bags of expired moth balls to go to her nephew; then her attorney probably should have made her aware that any assets that pass through the will become public knowledge and anyone can spot the funds and attempt to acquire them by contesting the will. Nearly anyone can contest it, maybe someone like, for instance, a peeved niece named Amanda.

The retirement accounts
In an attempt to allow for as few assets as possible passing on by the will, thus escaping probate as well as a host of other costs, Aunt Lilly might have considered listing Nathan as beneficiary on her Traditional IRA account. Lilly spent her working years as an administrator at the telephone company, and she saved pretax dollars into that IRA to defer taxation on her income.
At her passing, you can think of that account as a birthday gift stuffed overfull with heaps of taxable consequence and ripe to explode in a violent tax-splosion. Had Lilly not chosen a beneficiary, the tax-bomb would have blown upon her death, and the money would have become taxable, thus far fewer assets would have actually gotten to her nephew.
Alternatively, had Lilly simply listed Nathan as her primary beneficiary on the account, she would have privately passed the IRA, intact, on to her nephew thus dodging the tax bullet yet again. That said, her nephew, many years her junior, would be required to take fully taxable withdrawals from that account calculated in accordance with his own actuarial date of death. Being younger than his Aunt Lilly, Nathan’s requisite annual distributions from this “beneficiary IRA” should amount to a far smaller share simply because he is so far from his expected date of his death.
While this is hardly the kind of success story that translates well into a made-for-tv-movie, it allows for both an efficient and effective transfer of assets.

Bet you didn’t know
While many of us are well aware of the fact that IRAs and other types of retirement accounts almost always allow for beneficiary designations, fewer folks are aware of the ability they have to add beneficiaries to their other accounts.
Payable on Death (POD) and Transfer on Death (TOD) are simple contracts that can be added to most investment and bank accounts which simply allow for the same effective transfer as retirement accounts, absent the will, private from public knowledge, and by contract. Sadly, it seems that most people, like Lilly, never utilize these registrations simply because they are unaware of the opportunity.
Upon reflecting on her life, Aunt Lilly’s neighbors remember her as a quiet woman who kept to herself. In reality, she was a raucous standby on the Riverboat Casino and remembered by the security staff as the “roulette wizard.”
While her sizeable winnings had already been taxed commensurately in the years they were won, not having the money in a retirement account and being entirely unaware of TOD accounts, no beneficiaries were designated for the funds. It is anybody’s guess where the winnings will land.
But who are we to assume what our fictional, persnickety Aunt Lilly really wanted? We can simply count ourselves lucky that we are not responsible to serve as executors on this estate.
Remember, it’s your money and your plan, take control of it.

Anthony M. Conte is Managing Partner at Conte Wealth Advisors with offices in Camp Hill, Pennsylvania and Fort Myers, Florida. He has a Master’s Degree in Financial Services and the CERTIFIED FINANCIAL PLANNER ™ certification, and he welcomes your emails: tconte@contewealth.com.
Registered Representative Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors, LLC are not affiliated.