Authored by: Brenton D. Teeling, Vice President of Client Services and Administration.
In our business, one of the most important estate planning strategies is maintaining proper beneficiary designations. There are many variables to consider when naming beneficiaries: the type of account (trust, retirement, or insurance, to name just a few); goals regarding future distributions; and family dynamics including the ages of named beneficiaries.
Although it is impossible to cover all the rules and complex scenarios that might impact beneficiary designations in this article, here are some practical suggestions to help you decide whether a full review may be necessary.
- Beneficiary Forms: Many accounts allow for designating beneficiaries on forms prepared by the provider. When the account owner dies, account assets go directly to the named beneficiaries and avoid probate. Keeping these forms updated is crucial because the designations are likely to override your will.
- Review Frequently: Any life event (marriage, divorce, birth, death) that occurs to you or to anyone within the beneficiary pool may make it necessary to update designations.
- Consistency: Coordinate designations between your will and trust, being as specific as possible. If you make a change to one document, update the other for consistency.
- Contingent Beneficiary(ies): In the event that your primary beneficiaries die before they receive proceeds you designate, the naming of contingent beneficiaries will keep distributions as you intended.
- Consider Using “Per Stirpes”: If a beneficiary dies before you do, using the term per stirpes will transfer interests equally to the deceased beneficiary’s children.
- Minors as Beneficiaries: Children under the age of majority (18–21 years old depending on the state) are not legally able to control most types of assets. To avoid a court-appointed custodian, plan for assets to transfer into an account with a named fiduciary of your choosing, such as a trust with a trustee.
- Stepchildren: Unless legally adopted, stepchildren are not automatically recognized as rightful heirs. If you have nonbiological children that you wish to include as beneficiaries, avoid using words such as “descendants,’’ “children,’’ or “heirs.” In a blended family, those terms are subject to confusion. Instead, name each child and each stepchild using their individual names.
- Retirement Accounts: IRA’s, 401(k)s and other retirement accounts have definitive rules and distribution procedures that work when beneficiaries are clearly named and proportional interests are defined. Unfavorable tax implications may result when a retirement account is distributed to a trust or an estate.
- Estate as Beneficiary: Generally, naming your estate as a beneficiary is NOT recommended because assets will be subject to the delays and costs of probate. Not designating any beneficiary is the same as naming your estate as beneficiary and this can result in unfavorable tax consequences.
- Charitable Organizations: If your estate plan includes a charitable bequest, tax regulations now provide the avoidance of income taxes to an eligible organization if it is named as the beneficiary of an IRA and other types of retirement accounts. Targeting these types of accounts for your charitable bequests allows your beneficiaries to inherit other types of assets that could have more favorable tax treatment.
A strategic wealth transfer plan can be as customized as your family requires. A proper trust document prepared by an estate planning attorney can allow you to care for your loved ones well into the future. To support your efforts, Legacy has professionals with experience and expertise in reviewing documents and who can help ensure your designations are structured to accomplish your intentions and align with your overall estate plans.