This week we're looking at beneficiary designations - and what it's critical to keep in mind when it comes to these guys. So, let's define it first.
Assets that are registered as "transfer on death" or "payable on death" will transfer to a specified beneficiary upon your death. these types of assets were designed to automatically pass to beneficiaries, avoiding a legal proceeding, and keeping things simple. Examples of these assets include retirement plans, life insurance, IRAs and annuity contracts. The beneficiary can be an individual, a charity, or a trust, among othere things. For other examples, you can read about more assets with beneficiary designations here.
One thing to keep in mind is that these assets are not necessarily included in your estate plan. Hasty estate planning attorneys sometimes fail to mention the importance of beneficary designations because of this. So, if you have an estate plan already, be sure to check that your beneficiary designations are up to date, and consult with your attorney about the advantages and disadvantages of naming your trust as the beneficiary.
Now, while assets with beneficiary designations need not be named in your estate plan, they do still count as part of your taxable estate.
Let's get to the meat of the subject. What is essential for you to know about beneficiary designations. We'll start with 6 tips in this article, but keep in mind it's not a complete list and you'll want to consult with your estate planning lawyer to discuss the best options for you and your family.
1. Your beneficiary designation takes precedent over your Will. This one is especially important if you remarry and forget to change old beneficiary designations. Your new husband, for example, would not inherit your life insurance policy, even though you bequested it to him in your will, if the beneficiary on the actual policy was your old husband.
2. Consider the Tax Consequences for your beneficary. This point typically comes into play when either your assets are large, or your beneficiary's are. If you designate someone other than your spouse as a beneficiary, that amount will be counted as your taxable estate. This may push you above the estate tax limit. And while the estate tax marker is over $5 million this year, it may be significantly less the year you pass. As for your beneficiary, any inherited assets will be inlcluded in their estate, which could push them over the tax exclusion limit.
Investment guru Christine Benz also points out the tax consequences of company retirement funds. If you leave company retirement plan funds to someone other than your spouse, they may have to take distributions and pay tax on those distributions. Your spouse on the other hand, could simply roll over those assets into their own IRA.
3. Get to Know the fundamentals of Estate Planning. While you may not have done a formal estate plan, designating beneficiaries is in fact an important step toward completing your estate plan. The next step is a Will. After that you'll want to make sure to complete a Power of Attorney and Health Care Directive as well. Once you've got the basics down, check with a local estate planning attorney to get advice on what else you'll need. In California, most families with over $150,000 in assets will also find a living trust to be a good choice as well. Your estate plan should go hand in hand with your beneficiary designations, so don't forget to bring these up with your attorney too.
4. The Custodian (Bank, Insurance, etc) must have your beneficiary form on file. While this one may seem obvious, it's a great reminder to us all to get that stack of paperwork out and fax, email or mail the beneficiary form in ASAP. If the custodian of your account does not have your beneficiary on file, legally there is no beneficiary at all. Now, this brings us to our next point:
5. No beneficiary at all can be better than naming your Trust or Estate. With some assets this will not be an issue - naming your trust as a beneficiary is just fine, and might actually be advantageous. However, there are some assets/accounts that will cost your beneficiaries a lot of money if they pass through the estate. One such asset is the IRA. An IRA with a designated beneficiary is protected from creditors when the owner dies. If it passes through the estate, however, it can be used to pay the decedent's debts. Financial advisor Deborah Jacobs also points out in her article, When Bad things happen to good people with IRAs that your beneficiary will not be allowed to stretch out distributions if the IRA is left to the estate.
6. Consider Beneficiaries with Special Needs. Most loved ones with special needs take advantage of government benefits to provide for their well being. Their eligibility for benefits, however, may be affected if assets are bequested to them directly. A Special Needs Trust can ensure that they keep their benefits, while having additional support from an inheritance. The other thing to consider is whether or not they are able to manage the assets. In this case, a good Estate Planning attorney can advise you on your best option. This may simply be a trust with responsible trustee, but could also include a limited conservatorship.
If this seems like a lot to consider, hire a professional. A few thousand dollars spent on organizing your assets can save your loved ones thousands more in the long run. A good estate planning lawyer can help you organize your estate plan, and if necessary refer you to a financial advisor to help you keep everything in order.
As a Walnut Creek Estate Planning attorney, I help clients in Contra Costa County, Alameda County, and the San Francisco East Bay put together their estate plans. I offer a free consultation from my Walnut Creek Elder Law and Estate Planning firm, and am always happy to answer your questions. Call 925-322-1763 for an appointment or phone consult.