Estate planning must rank right up there with gum surgery as the type of chore in life that we are most likely to want to put off. We have trouble even saying the word “death”, as inevitable as it is for us all. So regardless of when we “check out” or “kick the bucket”, we are likely to leave a mess if proper planning isn’t in place.
Estate Plans (wills and trusts) are an important part of the process, as are having life insurance in place. Yet a topic that often gets less attention that it deserves is beneficiary designations. The act of adding someone’s name as a primary beneficiary is the creation of a contract as powerful as any will or trust an attorney can create. These designations tend to hide quietly behind the scene as most of us focus on the account investments and performance. They are not usually shown or reported to us on a regular basis or on any statements.
The following types of accounts have beneficiary designations to which special attention needs to be paid:
- Retirement Accounts of all types – IRAs, Roth IRAs, 401ks, Defined Benefit and Profit Sharing Plans, Deferred Compensation Plans
- Life Insurance Policies
- Annuities
- Brokerage accounts with Designated Beneficiary Plan/TOD (Transfer on Death) registrations
We do not mean to be giving legal advice here, as we are not attorneys. But in raising the topic we hope to put this important issue on the radar. The stakes are high. Once a death occurs, there is little that can be done to change the beneficiary choices the deceased was “supposed” to have made.
The Big Mistakes: Below are a few mistakes we have seen from time to time that we’d like to help you avoid:
- Failing to remove an ex-spouse as beneficiary on an account. Time marches on, things change. When you die, your former spouse gets the whole account if he/she is still named as beneficiary. Any major life change – divorce, remarriage or the death of a beneficiary should trigger a beneficiary review. Are your parents the beneficiaries on that retirement account you started at your first job? Is that still appropriate?
- Naming your living trust as beneficiary instead of a spouse or a natural person. A spouse who inherits an IRA or retirement account has many options, including a tax free transfer into their own IRA under the right circumstances. Naming a trust as a primary beneficiary technically requires the account to be distributed and taxed. The last thing a grieving spouse needs is an extraordinary tax bill.
- Naming beneficiaries without thinking of the overall context of your finances or the tax consequences to the heirs. An attorney, a banker or a broker can’t really give thoughtful advice without knowing quite a bit about your overall financial situation. Work with a trusted advisor to identify all accounts that might have beneficiary designations and make sure they are in alignment with your wishes.
Signing a document titled “My Last Will and Testament” does not take care of your beneficiary designations. If you need more motivation, click HERE for a very personal story from Yahoo Finance.1 We hope these few examples will inspire you to add a review of beneficiaries to the periodic reviews of your finances.
Feel free to contact us to further discuss this or other topics.
1 Note – not one of our clients. We cannot vouch for the source of this video. Even if it is only a dramatization, it is instructive.
