By: Frank Armstrong, CFP, AIF
Wills are an important part of estate planning. Every one should have one. But, wills only solve a few pieces of the estate-planning problem. You may find that your will might actually dispose of a small portion of your net worth. No matter what your will says, a large part of your property may bypass it. You may find that you have at least three different distribution methods that supersede the will.
- Some of your property might pass through titling of assets in joint names or as tenants by the entireties. This method of distribution is especially prevalent for real estate or investment accounts. The survivor simply gets the entire account or property.
- Many businesses or professional practices have buy-sell contracts between stockholders or partners that require an automatic buy out of the deceased’s interests at pre-negotiated price and terms.
- All your insurance policies, annuities, pension accounts and IRAs pass through contractual provisions called beneficiary designations.
Good estate planning requires a comprehensive view of all your property. Careful coordinating of all these different distribution schemes will insure that your estate actually passes to your desired heirs at the least cost and in a form that will most benefit them. Sloppy or incomplete planning with these other assets can turn your carefully thought-out will into irrelevant junk, driving up the cost of settling your estate, multiplying the taxes, and possibly putting assets into the wrong hands entirely.
Because insurance and pension assets may comprise the bulk of many families’ assets, this article will focus on important things you should know about beneficiary selection. As always, be guided by your professional advisors.
- No matter what your will says or what you have done with trusts, it’s the insurance/annuity contract or Pension/IRA plan document and beneficiary designation that control what happens to those assets at the death of the plan owner.
- Review your beneficiary selections after any life change. For instance, don’t inadvertently disinherit a new child or grandchild by failure to name them. In many states, a divorce will not alter a beneficiary designation. Promptly change beneficiary designations after a divorce, or your ex-spouse is likely to get the property.
- Failure to name a proper beneficiary, or the death of a beneficiary may throw the entire proceeds into your estate, subjecting it to additional costs and taxes. Always name contingent beneficiaries so that the prior death or disqualification of your primary beneficiary will not destroy your distribution plan.
- Some plan sponsors offer more limited choices than the law allows. Some allow individually drafted beneficiary designations, while others refuse to accept anything but their own forms. If your designation is at all unusual, have the custodian acknowledge that they can accept it. If necessary, move the account to an institution that provides the flexibility you need.
- Keep a copy of your current designation with your other important papers. Obtain an acknowledged copy from your insurance companies and/or plan custodians. It’s a great idea to query them once in a while to make sure that your records agree with theirs. Otherwise, if your paperwork is lost, your careful planning could be ruined. Trust me, this paperwork gets lost far more often than you would think.
- Never name a minor child or incompetent person as beneficiary. They are not eligible to own property. Name a guardian or trust to administer the funds for them.
- A trust may be a beneficiary. However, use caution in drafting both the trust and beneficiary designation so that you maintain both the estate tax and income tax benefits that you are entitled to. This is a particularly important consideration for IRA’s and pension plans where improper language in either the trust or the beneficiary designation might cause a disastrous acceleration of income tax. Make very sure that you have a highly skilled tax attorney draft both.
- If you name more than one primary or contingent beneficiary make sure that you clearly identify the proportional amount each should receive. Additionally, indicate what should become of each beneficiary’s share should he predecease you. For instance, should one of your children predecease you, should his/her share be paid to their children, or distributed to your remaining surviving children?