Making Cents: Beneficiary Planning For Senior Citizens
By: John P. Napolitano, CFP®, CPA, PFS, MST
It is second nature for many senior citizens to save as much as possible. These same seniors are such savers, that they are equally reluctant to spend any of their savings. This natural aversion to spending also applies to their retirement accounts. Whether the retirement account is a pension, 401K or an IRA, holding on to these retirement accounts too long may cause consequences that you didn’t intend.
In the case of any cash balance plan like a 401K or IRA, the owner of the account has a ‘walk away’ value at any time until the balance of that account runs out. Similarly, when a retirement account holder passes away, the balance belongs to whomever you’ve designated as your beneficiary. Make sure that you are aware of the beneficiary election and that it is appropriate under current circumstances. Retirement accounts without a living designated beneficiary will go to the estate of the deceased account holder with some adverse income tax consequences.
A common beneficiary election scheme involves the account to a spouse, if living, with the remainder to any surviving children. For unmarried people, you can name whomever you want. But in either case, it is important to note that this beneficiary election reigns supreme, regardless of what your will or trust says. This is why it is so important to make sure that these elections meet with your current desires and expectations. Many find out too late that retirement accounts haven’t been updated for years or decades, and watch those accounts find their way into the hands of former spouses, estranged family members or the estate of the deceased.
Realistically evaluate your beneficiary elections. If you’ve named children, who are already financially successful then consider bypassing them for the grandchildren. There are possible undesired consequences by designating a young person such as a grandchild. Take a moment and ask yourself if your life would have changed for the better or worse if someone had dropped a large account into your name at the age of 22? To do this right, consider the use of trusts to limit how much junior may withdraw in any given year to avoid a rapid depletion of the account.
Also understand the tax bracket of the people whom you’ve designated as beneficiary. If their tax bracket is much higher than yours, then perhaps spending money from your retirement accounts is not the worst thing in the world. If you can use that retirement money and only pay 15% federally vs. your daughters 40%+ bracket, that may be a smart choice from which to spend.
When checking your current beneficiary elections, ask your IRA custodian to send you a copy of what they have on file rather than just confirm your elections over the phone. In these days of mergers, consolidations and acquisitions of financial institutions, your heirs don’t want to find out that your IRA custodian can’t find your form after your death.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.