Transfer on Death

Forgot to Update Your Beneficiary Designations? Your Ex Will be Delighted

Your will does not control who inherits all your assets when you die. This is an aspect of estate planning that many people do not know. Instead, many of your assets will pass by beneficiary designations, says Kiplinger in the article “Beneficiary Designations: 5 Critical Mistakes to Avoid.”

The beneficiary designation is the form that you fill out, when opening many different types of financial accounts. You select a primary beneficiary and, in most cases, a contingency beneficiary, who will inherit the asset when you die.

estate planning beneficiary
If you don’t update your beneficiaries after a divorce your ex will receive some of your assets.

Typical accounts with beneficiary designations are retirement accounts, including 401(k)s, 403(b)s, IRAs, SEPs, life insurance, annuities and investment accounts. Many financial institutions allow beneficiaries to be named on non-retirement accounts, which are most commonly set up as Transfer on Death (TOD) or Pay on Death (POD) accounts.

It’s easy to name a beneficiary and be confident that your loved one will receive the asset, without having to wait for probate or estate administration to be completed. However, there are some problems that occur and mistakes get expensive.

Here are mistakes you don’t want to make:

Failing to name a beneficiary. It’s hard to say whether people just forget to fill out the forms or they don’t know that they have the option to name a beneficiary. However, either way, not naming a beneficiary becomes a problem for your survivors. Each company will have its own rules about what happens to the assets when you die. Life insurance proceeds are typically paid to your probate estate, if there is no named beneficiary. Your family will need to go to court and probate your estate.

When it comes to retirement benefits, your spouse will most likely receive the assets. However, if you are not married, the retirement account will be paid to your probate estate. Not only does that mean your family will need to go to court to probate your estate, but taxes could be levied on the asset. When an estate is the beneficiary of a retirement account, all the assets must be paid out of the account within five years from the date of death. This acceleration of what would otherwise be a deferred income tax, must be paid much sooner.

Neglecting special family considerations. There may be members of your family who are not well-equipped to receive or manage an inheritance. A family member with special needs who receives an inheritance, is likely to lose government benefits. Therefore, your planning needs to include a SNT — Special Needs Trust. Minors may not legally claim an inheritance, so a court-appointed person will claim and manage their money until they turn 18. This is known as a conservatorship. Conservatorships are costly to set up. They must also make an annual accounting to the court. Conservators may need to file a bond with the court, which is usually bought from an insurance company. This is another expensive cost.

If you follow this course of action, at age 18 your heir may have access to a large sum of money. That may not be a good idea, regardless of how responsible they might be. A better way to prepare for this situation is to have a trust created.  The trustee would be in charge of the money for a period of time that is determined by the personality and situation of your heirs.

Using an incorrect beneficiary name. This happens quite frequently. There may be several people in a family with the same name. However, one is Senior and another is Junior. The person might also change their name through marriage, divorce, etc. Not only can using the wrong name cause delays, but it could lead to litigation, especially if both people believe they were the intended recipient.

Failing to update beneficiaries. Just as your will must change when life changes occur, so must your beneficiaries. It’s that simple, unless you really wanted to give your ex a windfall.

Failing to review beneficiaries with your estate planning attorney. Beneficiary designations are part of your overall estate plan and financial plan. For instance, if you are leaving a large insurance policy to one family member, it may impact how the rest of your assets are distributed.

Take the time to review your beneficiary designations, just as you review your estate plan. You have the power to determine how your assets are distributed, so don’t leave that to someone else.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

Proper Planning for the Distribution of an IRA

Understand the rules, so the money goes where you want it to.

The rules for IRA distributions can be complicated. Unforeseen circumstances can make things even more complex. Understand the rules, so the money goes where you want it to.

Bigstock-Family-Portrait-At-Christmas-4881212What happens if you designate each of your two adult children as 50/50 beneficiaries of your IRA, and then one of them dies? Will the funds go to your grandchildren?

MarketWatchanswered that question in its article, “Who gets your IRA when you die? It’s not so simple.”The answer to what happens to the IRA money is dependent upon what the beneficiary designations say and when one of the children passes away. The beneficiary designations state how it will be distributed. However, that may not be what is written in your will.

If the children are alive when the IRA owner dies, and she simply named them 50/50 outright beneficiaries, they will each get half the funds. Each child could do whatever they wanted, including placing the funds in an inherited IRA account and naming their choice of beneficiaries.

 However, if either child dies before the parent with the IRA passes away, and she doesn’t update the beneficiary designation before she dies, there are two common default arrangements built into account forms for IRAs, retirement accounts, life insurance policies, annuity contracts, and “transfer on death” arrangements available in some states. One is per capita: if one child is dead at the time of the parent’s death and is still listed as a 50% beneficiary, then 100% of this share will go to the surviving child.

The other common arrangement is per stirpes—Latin for “by the root.” Here, rather than the predeceasing child’s share going to their surviving sibling, the share goes to the deceased beneficiary’s children.

Be sure to obtain a copy of what you filed for your beneficiary designations.  You should carefully review the language to be certain that it meshes with your wishes. If you want your assets to flow differently, speak with an estate planning attorney about drafting a custom beneficiary designation. Some people don’t want one of their beneficiaries to inherit outright and have free reign with the funds. An attorney can help protect that person and the money.

If you want to have people who are not “linear” decedents be beneficiaries, such as family friends or spouses of children, you’ll need to sit down with an estate planning attorney to make sure that the legal documents are correctly drafted. You may decide to use a custom beneficiary designation or trusts to achieve this.

Reference: MarketWatch(March 17, 2018) “Who gets your IRA when you die? It’s not so simple”

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