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Naming Beneficiaries

WHEN YOU OPEN a retirement account or purchase life insurance, you usually name beneficiaries to inherit these assets. This is also true when you set up a trust.

Because much of your wealth may be in IRAs, 401(k) plans and similar accounts, it’s crucial you have the right beneficiaries listed. Divorced? If you don’t change the beneficiaries on your retirement accounts, your ex-spouse may get the last laugh.

Whoever inherits your retirement accounts has to follow special rules when making withdrawals. They will also have to pay income taxes on those withdrawals, unless the money is coming out of a Roth account. Still, even with an embedded income tax bill, a retirement account can make a fine inheritance—assuming Congress continues to permit the so-called stretch IRA and assuming your beneficiaries take advantage of it.

By contrast, your beneficiaries typically won’t have to pay income taxes on life insurance proceeds. There could, however, be estate taxes owed, unless you arrange for the life insurance to be owned by somebody other than yourself. That somebody is usually not a person, but rather an irrevocable life insurance trust.

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