Choosing a beneficiary is another one of those things that you frequently forget about until there is a problem. Unfortunately, if you have a problem, it may be too late to change the beneficiary to help you.

Choosing a beneficiary is another one of those things that you frequently forget about until there is a problem. Unfortunately, if you have a problem, it may be too late to change the beneficiary to help you.


First off, there are only certain types of assets that require a beneficiary election. These include assets like retirement plans, IRAs, life insurance and annuities. For many people, besides their home, these may be their most valuable assets.


This beneficiary election is where you decide who gets the assets when you die. A beneficiary election is a legally binding document and has very strong power. For example, if your will says to leave your IRA rollover to your brother but your beneficiary designee on the policy is your former spouse, the ex gets it.


Where there is no beneficiary election, as is the case in more situations than you may believe, the asset will pass directly to your estate. This can be problematic for several reasons. First may be taxation. IRAs, for example, have special inherited rollover and distribution rules that may allow that inherited IRA to escape immediate income taxation and enjoy many more years of deferral. When you have no beneficiary election and the asset goes to your estate, these tax-friendly options typically do not exist and the tax is accelerated.


Another problem with no beneficiary elections is probate. A good beneficiary election means that the asset avoids the probate process and passes to your designated beneficiary. When your estate is the beneficiary, that asset now sits waiting for probate and the court's supervision of the division of your assets according to the terms of your will. That is, if you have a will. If you don't have a will, the disposition of your estate will be up to the probate courts in the state where you lived. This is a huge time drag, annoying and completely unavoidable.


When choosing beneficiaries that include minor children or people who may need assistance with managing the assets, consider talking to your adviser about using trusts.


Your homework task for the rest of the summer is to do a complete beneficiary review. Check with a qualified professional to be sure that your choices are handled in the most efficient manner given your objectives.


John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com.