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The Importance of Beneficiary Designations in Estate Planning

Having no beneficiary designations or improperly completing a beneficiary designation form will likely cause unintended consequences in your estate plan. The same is true with naming a child as a joint owner on a bank account rather than appointing the child to act as power of attorney over that account.

Many bank employees tell clients to just name a child as a joint owner on an account to help pay bills rather than appointing that child as agent under a power of attorney because it is simpler for the bank; they argue the account will otherwise be frozen when mom or dad dies and the funds not readily available to pay bills. Although delayed access to funds may be avoided, the child named as the joint owner is entitled to all remaining assets in the account and is not required to pay the parent’s last expenses after the parent dies. For example, assume mom’s main asset when she dies is a $150,000 savings account, one daughter is a joint owner on the account, and mom has two other children. Although the daughter who is a joint owner can pay mom’s bills while mom is living, the same daughter is entitled to the entire account when mom dies and is not required to share the account equally with her siblings even though mom intended an equal split of the funds. Even if the daughter who is the joint owner wants to share the account with her siblings, she will now be required to file a gift tax return because she is giving away more than $16,000 in one year (the current annual exclusion for gift tax purposes) to each sibling.

Designating beneficiaries or “payable on death” on your bank accounts, investment accounts, life insurance policies, and retirement assets is a simple way to transfer assets to your beneficiaries without requiring probate and without creating unintended consequences. With or without a Will, financial assets that do not name any specific designated beneficiary, are not jointly held, or are not titled in the name of a trust will require probate if the amount of the combined assets is $50,000 or more. Not only does probate delay distributions to your beneficiaries, but the court imposes a fee of .2% on the value of all assets requiring probate. Beneficiary designations make the transfer of assets to your beneficiaries much easier and less expensive.

When completing beneficiary designations, make sure you understand what happens if a named beneficiary predeceases you. Some beneficiary designation forms state if you name more than one beneficiary and one beneficiary predeceases you, the remaining surviving beneficiary or beneficiaries receive the entire account. If, for example, you instead want a predeceased beneficiary’s children to receive their share, the beneficiary designation must state contingent beneficiaries are “per stirpes” (equal split of the share for the beneficiary’s descendants).  

If your main estate planning document is a trust, you should coordinate beneficiary designations so these assets, other than retirement assets, designate your trust as the beneficiary or are retitled in the name of your trust. By designating your trust as the beneficiary, your trustee will have the liquid assets needed to pay your last expenses and administer the trust prior to distributions to beneficiaries.

Qualified retirement assets should always have a designated beneficiary. If you are married, federal law requires you name your spouse as the designated beneficiary unless your spouse signs a waiver allowing you to name a different beneficiary. All individual beneficiaries receiving qualified retirement assets must pay income tax on the assets as they are received. A surviving spouse may roll the qualified retirement account into his or her own qualified retirement account. Most other beneficiaries may roll the qualified retirement asset into an inherited IRA, but 100% of the retirement amount must be distributed to that beneficiary within 10 years. Naming your estate or trust as the beneficiary of qualified retirement assets means the asset must be distributed within 5 years, making the distributions very inefficient from an income tax perspective.

Like all estate planning documents, you should review your beneficiary designations at least once every five years to make sure nothing has changed. You should also review beneficiary designations when you have a life-changing event such as a marriage, new child or grandchild, or death of a named beneficiary.

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