by Henry Montag, CFP, CLTC
Whether you’re wealthy or earn a modest income, there is one estate planning concern that is shared by people from all walks of life—the decision of who gets what when you’re gone. While some individuals logically assume that a will is the only official forum to express such decisions, that’s not always the case. Often, an equally important issue in estate planning is who to name as beneficiary on life insurance policies, employer-sponsored retirement plan accounts and IRAs.
Life Insurance
No matter who is designated, the beneficiaries will receive the death benefit proceeds income tax free. Unlike property disposed of in a will, if the beneficiary designation form is properly completed, insurance proceeds do not go through probate.
For many married individuals, a spouse will be the most logical beneficiary. A trust may be a prudent beneficiary choice, however, if a surviving spouse would not have the ability to prudently manage a large sum of money. The trustees (often a legal entity rather than an individual) would then take charge of managing, investing and disbursing the policy proceeds for the benefit of the surviving spouse.
Be sure to name contingent or secondary beneficiaries. This means that if the primary beneficiary has died, the insurance proceeds will go to an individual or trust. If there are no surviving beneficiaries, then your beneficiary is generally the “estate of the insured,” which means the death benefits end up being probated and ultimately distributed according to the instructions of the decedent’s last will and testament. If an individual dies without a valid will (intestate), then the order of legal beneficiaries to whom assets are distributed is specified by that state’s law.
Employer-Sponsored Retirement Plans and IRAs
The law requires that a spouse be the primary beneficiary of a 401(k) or profit sharing account unless he or she waives that right in writing. A waiver may make sense in a second marriage—if a new spouse is already financially set or if children from a first marriage are more likely to need the money.
Single people can name whomever they choose as beneficiary, and non-spouse beneficiaries are now eligible for a tax-free transfer to an Individual Retirement Account. The IRS has also issued regulations that dramatically simplify the way certain distributions affect IRA owners and their beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.
Naming Children May Not Be Best
Naming children as beneficiaries may cause unforeseen problems. For example, insurance companies, pension plans and retirement accounts may not pay death benefits to minors. The benefits would likely be held until they could be made to a court-approved guardian or trustee of a children’s trust. A guardian, trust or trustee should be named beneficiary to ensure competent management of the proceeds for the children. By naming a children’s trust as a beneficiary, for example, the proceeds could be invested and managed by a competent trustee (a person or institution) you choose. A revocable living trust could also be named as a beneficiary, which keeps the proceeds out of probate.
Keep Your Plan Up-to-Date
When completing overall estate plans and wills, it is imperative to readjust all beneficiary designations so that your estate plan accurately reflects your intentions. Remember, outdated beneficiary designations (e.g., older parents or ex-spouses) could misdirect the intended flow of an entire estate unless changed now.
Also, keep in mind that beneficiaries are paid directly as named. Thus, beneficiary designations are not governed by the wording of wills.
As is always the case with estate planning, consult with qualified professionals concerning your particular situation in order to ensure that your beneficiary designations are in tune with your goals.
When Naming Beneficiaries And Owners of contracts, Remember to Consider…
· The age of the beneficiary. Many policies and plans will not directly transfer assets to minors until a trustee or guardian is approved by a court.
· The ability of the beneficiary to manage assets. Perhaps a trust set up in the person’s name would be better than a direct transfer.
· Employer-sponsored retirement plans. Unless expressly waived by the spouse in writing, the law requires a spouse to be the primary beneficiary of the account.
· Naming contingent beneficiaries and Owners. Should something happen to your primary beneficiary, the contingent beneficiary would receive your assets. If the contract is owned by the Insured it is unnecessarily includable in his/her Estate for Estate and State tax transfer purposes.
IN ADDITION TO THE ABOVE IT’S OF COURSE ALSO IMPORTANT TO CONSIDER WHETHER THE TYPE OF LIFE INSURANCE YOU OWN IS THE RIGHT TYPE, WHETHER IT WILL LAST FOR THE DURATION THAT FITS IN WITH YOUR SPECIFIC NEEDS AND OF COURSE WHETHER ITS STILL COMPETITIVELY PRICED IN RELATION TO WHAT’S AVAILABLE TODAY. REMEMBER LIFE INSURANCE COSTS HAVE DECREASED IN PRICING OVER THE LAST 7-10 YEARS. I LOOK FORWARD TO HEARING FROM YOU WITH ANY QUESTIONS.
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About the Author: Henry Montag is an Independent Certified Financial Planner as well as a CLTC. He’s been in practice since 1976. He is a contributing writer for The Moneypaper, a national financial publication, and sourced by Investors business Daily, Long Island Business News, Newsday, Wall St Journal, The Moneypaper, Investment News, Senior Lifestyles and has held insurance and securities licenses for over thirty years.
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