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Understanding Beneficiary Designations Thumbnail

Understanding Beneficiary Designations

When I ask you to name a famous family feud, what names come to mind? 

My guess is that 90% of you immediately thought of the Hatfields and McCoy’s.  Thankfully, most family feuds don’t result in family members killing each other like theirs did.  However, squabbles between family members happen frequently and some of the worst occur over money when a parent or grandparent passes away. Fortunately, there are a lot of seemingly small, trivial steps you can take to prevent some of this family friction.  

A simple step that can help keep the peace should you pass away is checking and updating your account beneficiaries on a regular basis. You may have listed a spouse, parent, or sibling when you signed up for a 401k at work and haven’t paid attention to it in the years since.  We all experience many changes in life such as:  marriages, jobs, children, grandchildren, death, divorce, or blended families.  Beneficiaries specified on an account supersede any will so it is vital they are set up correctly.  

It's very important to list all of the beneficiaries on each account. Designating one child as the beneficiary because “you know they will split it up evenly” is not the best for your family or for that child.  Taxes on some distributed funds are connected to the social security number on the claim form.   You may be unknowingly adding a financial burden on to one child.  Identifying each beneficiary so they can make their own individual financial decisions is best.

Now before you go and start pulling up your accounts online or call your financial advisor, I want to explain one detail you should be mindful of.

A powerful, yet fairly unknown, tool is the Per Stirpes checkbox.

 Let me explain it using an example:  Say you have 2 children, each with two children of their own, who are listed as 50/50 Primary beneficiaries and one sadly passes away before you do and you never updated your beneficiaries.  

If that Per Stirpes box is not checked the surviving child will receive 100% of the account.  

However, if that Per Stirpes box is checked then the deceased’s share will pass through to their heirs, your grandchildren!

That little checkbox could be the difference between a smooth transition and starting a family feud.

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