H is for Helping Your Beneficiaries Avoid a Big Tax Hit


Beneficiary structure is often overlooked when creating a  financial plan. Many have their spouses as their beneficiary and no named contingents, thinking this will be planned out in their will. That works well except when both parties die and there are no designated contingent beneficiaries. When this happens, the money goes to the estate and at which point the estate has to deal with “A Big Tax Hit”.

This tax hit may have two downsides, one it greatly reduces the amount of the retirement funds and two, it may also push your heir’s  into a higher tax bracket upon receiving the inheritance. However, if you consider the tax consequences now and put a little planning into your legacy, you may help them avoid paying unnecessary taxes when receiving your gift.

You can pass your IRA to a contingent beneficiary and it doesn’t have to be taken out in a lump sum. The money can be disbursed in small increments that can be stretched over the beneficiary’s lifetime or even passed on to future generations. The IRA remains in your name but should be designated “for the benefit of Jane Doe, beneficiary.” By doing it this way, only the required minimum distribution (RMD) need to be withdrawn and taxed annually. It will start on December 31 of year it is inherited.

There are simple things you can do to help you beneficiaries avoid “tax hits”. Contact your local financial advisor to “help” put you on the right track.
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About Ann Zuraw

Ann Zuraw, the voice behind "Chicks, Chat and Change", is a Certified Financial Planner (CFP®), Chartered Financial Analyst (CFA®), and Certified Divorce Financial Analyst (CDFA™).If you have comments on this post contact Ann Zuraw

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