We constantly remind clients to review their estate plans, making
sure that wills and other estate planning documents (powers of
attorney, living wills, and health care proxies) are up to date.
Doing so is necessary but not nearly sufficient. What is equally
important is to review and update your beneficiary designations.
First, beneficiary designations override the will and avoid the
probate process. That is, assets such as IRAs, Roth IRAs, qualified
employer retirement plans, life insurance death benefits, and
deferred annuities all pass to heirs via beneficiary designations
provided to plan administrators by the owner. Generally, the
will only becomes involved when no beneficiaries are named. In
this case, the estate is the default beneficiary and the will then
dictates the ultimate disposition of the funds.
Second, it is far better to name individuals, trusts and/or charities
as beneficiaries of IRAs and qualified employer retirement plans
rather than the estate. If the estate is named as beneficiary or
becomes the default beneficiary, the estate is generally required
to liquidate the entire account and pay the resulting income tax
at highly-aggressive ordinary income tax rates.
As noted earlier, life insurance proceeds are directed by
beneficiary designation. Generally, it is best to direct such
proceeds to individuals or trusts. This ensures that the money
flows immediately and is not delayed awaiting probate. In some
instances, directing all or a portion of these proceeds to the
estate is advised to ensure adequate estate liquidity.
Name contingent beneficiaries. In most cases, contingent (and
sometimes third-level beneficiaries) should be named. This
takes care of situations in which the primary and/or contingent
beneficiaries pass first. It also allows for a hierarchy of pathways
in case the primary and/or contingent beneficiaries wish to
disclaim a portion or all of the bequest. This is a flexible and
smart estate planning tactic.
Keep designations up to date. Typically, beneficiary designations
are enacted over a period of years, oftentimes over decades.
Over such a span of time, family members die and/or are born,
marriages dissolve, and other circumstances change. It is no
wonder that designations can end up being highly inconsistent
across one’s IRAs, employer retirement plans, and life insurance
policies.
Don’t guess on this one. Make a list of all accounts/policies
that have beneficiary designations, contact the associated
administrators, and confirm. Correct any inconsistencies by
filing new forms. Be sure to keep updated copies of all beneficiary
designation forms in your personal files.
Consider the financial and emotional readiness of your
beneficiaries. Pre-tax accounts and life insurance proceeds left
directly to beneficiaries generally can be fully accessed by such
beneficiaries. In other words, they can be emptied and spent.
If your heirs are not prepared to handle such an inheritance,
consider trusts as beneficiaries. With trusts created during your
lifetime or at death through your will, you can specify the ground
rules and timeframe for your beneficiaries’ access to the funds.
Seek professional guidance. As with other important financial
matters, be sure to partner with a trusted financial planner
and an attorney to ensure that the design of your beneficiary
designation array represents your interests and is consistent with
your overall estate plan design. This exercise is
much too important to leave to chance.
This article was written by James Terwilliger, CFP®, Senior Vice President, Senior Planning Advisor and published in the November-December edition of 55 Plus. To see the full version of this article in 55 Plus, visit Roc55.com.
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