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Preserving your financial legacy

August 01, 2014

You've worked hard to build your retirement fund, so what will happen to your nest egg when you're no longer here? Have you made decisions about who will receive your savings, and if so, are your beneficiaries current?

If you're unsure of the answers to these questions, you'll want to take a closer look at what assets are going to the people and organizations of your choosing. Here are a few reasons why designating a beneficiary on your retirement accounts is a good idea.

Additional considerations for same-sex couples

For federal tax purposes, the IRS recognizes the marriage of same-sex individuals under the following circumstance: The marriage must take place in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex. As long as this requirement is met, the union is legally binding even if the couple resides in a jurisdiction that doesn't recognize the validity of same-sex marriages.

Be aware that marriage laws—and your rights as a spousal beneficiary—vary depending on where you live, both in terms of who would receive the retirement accounts and the state estate, inheritance, or income tax treatment of that inheritance. If at the time of your death you live in a state that doesn't recognize same-sex marriages and your spouse is listed as a default beneficiary, he or she may not receive your assets.

Creating peace of mind

By naming beneficiaries on your retirement accounts, your money will go where you want it to go. If you don't select beneficiaries, your assets will pass to the default beneficiaries currently named under Vanguard's IRA Custodial Account Agreement: your spouse (if you're married) or your estate (if you're single).

You can designate a secondary beneficiary in case your primary beneficiary dies before you or declines the inheritance.

Once you name your beneficiaries, it's a good idea to keep that information with your other legal papers. Talk to your loved ones, and tell them where to find the documents. If appropriate, include the contact information for the legal advisor handling your estate.

Vanguard has a team of specialists who can help your beneficiaries or your executor with the account transfer process.

Lightening the load on your heirs

Naming beneficiaries for your retirement accounts can take away one burden during a difficult time for your heirs.

If your assets pass to your estate, distribution may be delayed—perhaps even for a period of years—as your estate makes its way through probate, the legal process for settling estates. If you don't name beneficiaries, your loved ones could be subject to higher income taxes and possibly receive a smaller share of your hard-earned retirement savings.

Alisa ShinIt's important to recognize that any beneficiary designations in place on your retirement accounts will supersede any conflicting provisions in your will, trust, or other estate planning documents. You should review your designations periodically with your attorney, legal advisor, or estate planning professional to ensure that your designations suit your needs and are properly integrated into your overall estate plan.

"Retirement accounts payable to an estate may, depending on the age of the decedent, have to be withdrawn over a 5-year period, as opposed to over your life expectancy. That results in a substantial income tax hit that may have otherwise been drawn out over a beneficiary's life expectancy,” explained Alisa Shin of Vanguard Asset Management Services™.

Avoiding hard feelings

Kristin BarryA study by the Institute for Preparing Heirs found that 70% of wealthy families lose a significant portion of their assets during wealth transfer. "And the number-one reason is not faulty documentation or estate planning, but communication and trust within the family itself," Kristin Barry of Vanguard Financial Advisor Services said.

Without named beneficiaries, your wishes could be open to speculation and could divide your family, so be sure to discuss your decisions with them. Talking about your plans may be uncomfortable, but it will make your intentions clear and hopefully reduce the likelihood of legal proceedings involving the distribution of assets. For a discussion of this topic, check out "Money talks . . . Why don't we?"

For more information about the beneficiary process, refer to Vanguard's Guide to beneficiaries.

Note:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • We recommend you consult a tax advisor concerning your individual situation.
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