By Barbara S. Schlichtman: Barbara S. Schlichtman is the chair of the Trusts and Estates Department at Perkins Thompson PA in Portland and the Maine Center for Elder Law, which has offices in Kennebunk and Portland.
Understanding your assets today builds the foundation for a smooth estate administration that increases the likelihood your wishes will be followed. Organization makes the difference between leaving an easily executed legacy versus a quagmire that leads to family feuds and legal fees.
A step toward organizing that you can undertake on your own is to review beneficiary designations. At the time of death, a person’s “stuff” is divided into two categories: probate and nonprobate. The distinction is that probate items must go through the probate process, which is distributed under court supervision pursuant to the terms of a will. Nonprobate items pass without court involvement. Examples of nonprobate assets are jointly owned homes, retirement accounts with beneficiaries and joint bank accounts.

The distributions in a Last Will and Testament receive a lot of attention in families. But a less talked-about, but often more impactful, estate planning tool are the beneficiary designations. Retirement accounts are often one of the most significant assets owned by a family, and one of the easiest assets to organize.
Updating beneficiary designations does not involve an attorney. The updates are made on a form or a website portal directly with the custodian of the accounts. The beneficiary designations are instructions to the custodian about who receives the funds upon death, so they do not require court involvement. Sending the custodian an original death certificate should be enough to start the process. The named beneficiaries will receive a packet where they can select how they would like to receive the funds.
Failing to have a beneficiary on retirement accounts can have detrimental tax consequences, so regularly check beneficiaries on retirement accounts. Failing to list a human being as a beneficiary can result in the estate having to recognize the entire account as income in one year. So, it’s crucial to confirm you have a primary beneficiary and contingent beneficiaries.
Who should I name as beneficiary of my retirement accounts?
Naming a spouse - When naming a spouse as the beneficiary for an Individual Retirement Account (IRA), certain rules and considerations apply. A spouse beneficiary has unique options not available to other beneficiaries. Upon inheriting an IRA, a spouse can choose to treat the IRA as his or her own, allowing the spouse to continue contributing to it if eligible, or the spouse can roll the assets into her own IRA. Alternatively, the spouse can choose to remain as the beneficiary and take distributions over her lifetime, based on her life expectancy. This choice allows for potentially lower required minimum distributions (RMDs) and continued tax-deferred growth. It's important to review and update beneficiary designations regularly to ensure they align with current wishes.
Naming someone other than the spouse - Naming a nonspouse as the beneficiary of an IRA involves different rules and options compared to naming a spouse. When a nonspouse inherits an IRA, they cannot treat the account as their own or make new contributions. Instead, they must withdraw the entire balance within 10 years of the original owner's death, as mandated by the SECURE Act of 2019. These withdrawals are subject to income tax, but the nonspouse beneficiary has flexibility in timing, allowing for tax planning opportunities within the 10-year period. Some exceptions to this rule exist for eligible designated beneficiaries, such as minor children, disabled individuals, and those not more than ten years younger than the deceased account holder.
Naming a Minor as a Beneficiary - If you name an underage child, then someone must be named to manage the money until the child reaches maturity. Failure to do so requires a court order appointing an individual to manage the funds, which becomes an unnecessary complication. Assets can be left to a minor either under the UTMA or UGMA act, Uniform Transfer to Minors Act and Uniform Gifts to Minors Act. These acts are tools to avoid setting up a trust, so they’re a bit simpler and cheaper. However, upon the age of majority, the child has full access to the funds, which includes being treated as an asset in applying for college aid. Each state has adopted its own version of these laws. To do so, the beneficiary designation language must include the name and identifying information of the child, the name and identifying information of the individual or custodian to manage the funds and make reference to the act. For example, “Martha Trustworthy, former spouse of the insured, as custodian for Junior Trustworthy under the Maine Uniform Transfers to Minors Act.”
Naming a Charity as a Beneficiary - Naming a charity as the beneficiary of an IRA can be a tax-efficient way to export charitable intent. When a charity inherits an IRA, the funds are not subject to income tax upon distribution, unlike distributions to individual beneficiaries. This can maximize the charitable donation's impact, as the full value of the IRA goes directly to the charity. Additionally, naming a charity as a beneficiary can reduce the size of the taxable estate, potentially lowering estate taxes for the account holder's heirs. This strategy can be particularly beneficial for IRAs with significant tax-deferred growth, as it avoids the potential tax burden on individual beneficiaries.
Can non-retirement accounts have beneficiaries? - You can also list beneficiaries on other accounts such as banks and non-retirement investment accounts. Banks often refer to this as “Transfer on Death” instructions. The outcome is the same. The instructions work as end-of-life instructions and avoid probate.
Utilizing beneficiary designations is a smooth, simple way to transfer assets after death. One thing to be aware of is that it does not leave money in the estate to pay final expenses. Each family needs to decide how they would like to handle these logistics on a case-by-case basis.
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