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DON’T DO DUMB! Provide for Your Heirs, not the IRS!

October 12, 2023

It takes hard work and discipline to build an investment nest egg.  Unfortunately, many investors fail to take the correct steps to best protect their efforts after they’re gone.  The actions needed to wisely hand your investments to survivors are very simple, still many are unaware of the consequences when they fail to name beneficiaries on their investment accounts.


Why Name Beneficiaries?

By designating beneficiaries on your investment accounts, you are specifying who will receive your investment account when you pass away.  If you pass away without named beneficiaries, those accounts will likely be subject to probate.  Probate is a court-supervised process of distributing your assets.  Probate can be an expensive and painstaking process for your heirs, and it opens the door for creditors to lay claim to your assets.  By simply naming beneficiaries, your heirs can avoid the probate process.


Are There Tax Consequences for My Beneficiaries?

When a qualified account such as a 401k or an IRA is inherited by a beneficiary other than a spouse or minor, the beneficiary must liquidate the account within 10 years. Distributions taken by the beneficiary from that inherited account are taxable to the beneficiary at their marginal tax rate. 


Conversely, non-qualified accounts are inherited free of any tax liability.  Only gains since the account was inherited are taxable to the beneficiary, and even then gains are taxed at more favorable capital gains tax rates. 


Considering these differences, if you have multiple beneficiaries with significant differences in household incomes inheriting your investment accounts, it makes sense to leave a greater percentage of any qualified accounts to beneficiaries with lower household incomes and more of your non-qualified accounts or assets to beneficiaries with higher household incomes.  This strategy allows ALL your beneficiaries to keep more of their inheritance and pay less in taxes.