Transfer on Death Beneficiaries


In this episode of StreetSmarts with Howe & Rusling, Mary Lisa Sisson, Vice President, Director of Client Service goes beyond the bell to explain the importance of transfer on death beneficiaries.

Hi, I’m Mary Lisa Sisson, Vice President, Director of Client Service, at Howe & Rusling. In this segment of StreetSmarts I’m going to discuss the concept of IRAs and Transfer on Death beneficiaries, and why you should have them.

First, there are some terms to be aware of such as primary and contingent beneficiary.

The primary beneficiary will be the first in line to receive your assets. Contingent beneficiaries are also important because they will receive your assets if none of your primary beneficiaries survive you or if they disclaim your assets. A beneficiary can disclaim all or a portion of his or her inherited benefit.

Other terms to be familiar with are per stirpes and per capita.

Per stirpes uses a generational approach or “by the root” as some say. If a named beneficiary precedes you in death, then the benefits would pass on to that person’s children in equal parts. So, if you have two children, and one were to predecease you in death, the other child would receive half, and the children of the deceased child would get the other half. Per capita states that all beneficiaries receive an equal share of the distribution. In the event of any beneficiary predeceasing you, the distribution will be shared equally among the remaining beneficiaries. So, if there were originally four beneficiaries, but one precedes your death, then the remaining three beneficiaries would each receive 1/3rd of the distribution. Either one of these options or neither may be chosen when designating primary and contingent beneficiaries.

Now, why is it a good idea to designate beneficiaries on your IRA?

It often happens that IRAs have to go through probate when existing beneficiaries pass and are never renamed, therefore creating a “gap” in designations. First the funds will have to go through probate before being distributed to heirs, which is expensive, time intensive, and may also expose retirement funds to creditors. The greatest benefit to naming beneficiaries is to avoid probate.  If an estate ends up as beneficiary of a retirement plan, required post death distributions from the account will be made under the least generous rate, and potentially increase the total income tax liability on the funds.

Next, we move on to taxable accounts. It is also possible to name beneficiaries on taxable accounts, which we call Transfer on Death or TOD. Again, ensuring that an investment account is titled TOD is an effective method for bypassing probate. A TOD designation will allow the account to transfer directly to the chosen beneficiaries even if the account owner had a last will and testament or revocable trust that stated otherwise.

TOD is even a good idea for joint accounts in most instances. Multiple owners may maintain a joint account with rights of survivorship with an undivided interest in the TOD account. When one owner dies, their share of the account is immediately divided between the surviving owners equally. There are some downsides to this for a joint account: In some instances, TOD beneficiaries may be disinherited. For TOD accounts of married couples, if one spouse dies, the surviving spouse will have sole control to change beneficiaries. With this power, a surviving spouse may disinherit children from a previous marriage. Also, if a minor has been named the TOD beneficiary, and the child receives the assets prior to reaching age 18, a court-supervised guardianship must be established to manage the assets. Once the child reaches age 18, they will have access to the assets with no strings attached.

One last note about beneficiaries, an effective way to meet charitable inclinations while also receiving the charitable estate tax deduction thus lowering gross estate, is to name a charity or charities as beneficiaries of your accounts.

As you can see, it is important to review your beneficiaries regularly. Never leave an IRA without a beneficiary. You can update your beneficiaries at any time and as often as you like, so it is wise to ensure that your beneficiaries are up-to-date and reflect your wishes. Please contact your Howe & Rusling service team so that we can help you make sure that your accounts are current with this very important information. Thank you for watching today’s episode of StreetSmarts, and we hope to see you next time!

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