Why Do I Need a Contingent Beneficiary?
October 22, 2018

Recently, as part of “Walking with You on Your Journey,” we have begun a review of the beneficiaries on your accounts. We are doing this as a way of making sure your assets are distributed to whom you wish and in the most tax-efficient manner.

Most people, if they are married, name each other as the primary beneficiary. Or a single person might name a friend or relative as a primary beneficiary. However, what if these people are no longer living at the owner’s death? This is when a contingent beneficiary becomes important. This person, multiple people or charity could be listed as next in line to receive the assets if the primary beneficiary is not living.

If no contingent beneficiary is named, and the primary beneficiary is no longer living, then the assets will be distributed according to the Last Will and Testament of the account owner. This might not be a problem unless it is an IRA.

An IRA is a special type of asset that represents earnings that have never been taxed. If these assets do not have a living beneficiary at the owner’s death, then the assets will be distributed in a lump sum through the Last Will and Testament. When beneficiaries receive IRA money in one lump sum it is taxed on top of their regular income. This can lead to very high tax bills.

On the other hand, if a named beneficiary receives the money directly from the IRA, then they have the option to take the taxable distribution a little bit every year and therefore remain in a lower tax bracket by spreading the distributions out over time.

Let us say someone has $100,000 in an IRA. By naming a beneficiary directly, the beneficiary would have the option to receive a taxable amount slowly over their lifetime and most likely stay in a lower tax bracket. Alternatively, if they received the IRA money through the Last Will and Testament, and were in a 22% tax bracket, it would most likely move them into a 32% tax bracket. A 10% increase in tax!

As our clients’ advisors, it is always our goal to help them now to be the best steward of their blessings for the future.

W. Lee Shertzer

W. Lee Shertzer

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