Six Creative Beneficiary Designation Ideas

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Six Creative Beneficiary Designation Ideas

The majority of beneficiary designations are straightforward. Spouses leave retirement accounts primarily to each other and contingently divided among their children. If their children have not yet reached the age of majority, a trust may be involved.

For many, these simple and common beneficiary designations are the perfect fit for their wishes. For others, they want something more but haven’t yet thought of it. Here are 6 beneficiary designation ideas to inspire your estate planning creativity.

1. Use per stirpes to include your children’s families.

If you set your contingent beneficiary designations to divide your estate between your children, you may disinherit their families. If one of your beneficiaries predeceases you, then standard beneficiary designations will simply take his share and divide it equally among the remaining beneficiaries.

However, if you use the per stirpes designation and your beneficiary predeceases you, then his share will be divided equally to his line, meaning to his legal children and, if any of them predeceased you, to their children. This pattern continues until there is no more line at which time the predeceased beneficiary’s share would be divided equally among the remaining beneficiaries’ shares.

2. Use per stirpes but also include spouses.

Per stirpes looks purely at children: your son, then your son’s children, then your grandchildren from your son. Your son’s wife will be skipped over. For many families, this is how they want it, but for others, children-in-law have become as close as children and they want them included too.

There are two ways to do this and they have slightly different effects.

First, if your beneficiary designations allow you to write “see attached” – as many do – then you can write the inclusion of your child-in-law as an attachment.

I did this with the following paragraph:

{Beneficiary Name} or, if {Beneficiary Name} should predecease me, to {Beneficiary Name}’s spouse, {Spouse Name}, provided that {Spouse Name} and {Beneficiary Name} were married at the time of {Beneficiary Name}’s death, or, if both {Spouse Name} and {Beneficiary Name} should so predecease, to {Beneficiary Name} per stirpes

An estate attorney would be able to craft you a paragraph to suit your personal needs.

Second, if your beneficiary designation does not allow a prose description, you can include your child-in-law as a contingent beneficiary with his or her own share and set both your child and your child-in-law as per stirpes.

If one should predecease you, his or her share will go to the children, while the spouse’s share will go to them.

3. Set grandchildren as the contingent beneficiary of Roth IRA accounts.

Roth IRAs grow tax free and have no taxes owed when the money is withdrawn. During the account owner’s lifetime, there are also no required minimum distributions.

When a Roth IRA is inherited the government requires the beneficiary to gradually begin taking money out based on the new owner’s age. The younger that the beneficiary is the smaller the required withdrawals are and the longer the money can grow tax free.

When a spouse inherits an IRA, they can assume it as their own and, if they do so, ignore inherited required minimum distribution rules. A spouse is usually named the primary beneficiary.

Leaving money in a Roth IRA to a young person provides tax free growth for as long as possible. Receiving a lifetime of tax free income is a wonderful way to remember grandparents. You could designate the youngest generation of each line, grandchildren where families where blessed with them and children when they were not. Or you could simply divide it per capita among all of your descendants, grandchildren or children.

4. Set withdrawal limits on inherited accounts.

Many people worry that if they leave a Roth IRA to young person, there will be a temptation to immediately spend the money and therefore lose the benefits of stretching withdrawals over an entire lifetime.

To assuage this concern, you could leave your IRAs to separate trusts for each beneficiary and set a provision limiting withdrawals to just the required minimum distributions required by the tax code. This could ensure the legacy of your gift.

5. Leave a traditional IRA or HSA to charity.

Withdrawals from traditional IRAs and other pre-tax accounts are taxed as ordinary income for beneficiaries. But when the beneficiary is a charity, no tax is owed. If you have charitable intentions, you can leave your pre-tax accounts to your favorite charity and leave Roth accounts to individuals.

When considering which accounts to leave to charity, consider any Health Savings Accounts (HSAs) you may own. An HSA acts a lot like an IRA for savings purposes except that it has no required minimum distributions during your life time but must be entirely liquidated and tax paid when inherited. This makes an HSA one of the first types of accounts you should leave to charity to avoid unnecessary taxes.

6. Leave your traditional accounts to a donor advised fund.

Leaving part of an IRA to charity and part to individuals can make it more difficult to fulfill your year of death required minimum distribution. Each named charity must be found and their portion distributed, which can take time and delay the inheritance of the other individuals.

To avoid the time and effort required to identify and contact several different charities, you can leave whatever portion you wanted to leave to charity to your donor advised fund. Then, you can leave instructions on your donor advised fund as to how to divide the assets among the different organizations.

Changing your charitable intentions as part of a complex estate plan can be difficult, but changing instructions on your donor advised fund is as simple as submitting new paperwork.

These are just some examples of the creative beneficiary designations, but the important part is to dream big about what your wishes are.

Photo used under Flickr Creative Commons.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818…)

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine

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