| Regardless of their level of personal wealth, there is one
estate planning concern that is shared by people from all walks of life - the
decision of who gets what when you are gone. While many people logically assume
that a will is the official forum for expressing such decisions, that's not
always the case. For instance, did you know that the proceeds from workplace
retirement plans, IRAs and life insurance policies are passed on independent of
what may be spelled out in a will?
Naming beneficiaries to these types of accounts is one of
those planning activities that is typically given too little thought, however those
named to inherit such assets often face unique tax and legal consequences.
Employer-Sponsored
Retirement Plans and Individual Retirement Accounts (IRAs)
Regarding employer-sponsored plans, such as 401(k)s, an
individual who is not married can name whomever they like as beneficiary. If
you are married, however, federal law states that your spouse is automatically
the beneficiary of a 401(k) or profit-sharing plan. If you wish to name someone
else as beneficiary, then your spouse must sign a written waiver.
For example, someone who has been separated from his or her
spouse may wish to name a domestic partner as the intended beneficiary. The
spouse still has a legal claim to the 401(k) assets, and the domestic partner
will not be able to receive the funds unless the spouse signs a written waiver.
A waiver may be appropriate in other situations, such as a second marriage in
which children from the first marriage need the money more than the new spouse.
Until recently, one drawback was that nonspouse
beneficiaries were not eligible for tax-deferred transfers to IRAs. Instead,
these beneficiaries would have to begin taking distributions, on which they
would be required to pay income tax. However, rules signed into law in 2006
allow nonspousal beneficiaries to have qualified plan proceeds rolled over into
a special type of IRA called a "Decedent IRA" set up on behalf of the
beneficiary via a trustee-to-trustee transfer.
The IRS has also issued regulations that dramatically
simplify the way certain withdrawals affect IRA owners and their beneficiaries.
Consult your tax advisor on how these rule changes may affect your situation.
IRS regulations do allow nonspousal beneficiaries to
annuitize retirement plan distributions over the life of the beneficiary.
Check with your employer or policy issuer to find out if this is an option
under your arrangements prior to naming a child as a beneficiary. A competent
financial professional and tax advisor can also offer guidance as to whether
this action may be appropriate for you.
Life Insurance
No matter who is designated as beneficiary of a life
insurance policy, he or she 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 people, a spouse will be the most logical beneficiary.
A trust
may be a better beneficiary choice, however, if a surviving spouse was not
capable of (or comfortable with) managing a large sum of money. In this case,
the trustee
(often a legal entity rather than an individual) would 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. A
secondary beneficiary - either an individual or trust - would be next in line
to inherit the insurance proceeds if the primary beneficiary predeceases the
insured. 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 state law.
Avoid Naming Minor
Children
Naming minor children as beneficiaries may cause unforeseen
problems. For example, insurance companies and retirement accounts may not pay
death benefits to minors. Instead, these benefits are held until they can be
paid to a court-approved guardian and/or trustee
of a children's trust or until the child reaches legal age. 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, 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
important to occasionally review and readjust all beneficiary
designations so that your estate plan accurately reflects your wishes.
Remember, outdated beneficiary designations (e.g., older parents or ex-spouses)
could misdirect the intended flow of an entire estate plan unless changed now.
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.
This article is
not
intended to provide specific advice or recommendations for any
individual.
Consult your financial advisor, with questions. John Bennett Petrick
and the
representatives of Perennial Financial Services are registered
representatives
with and offering securities through LPL Financial, Inc.
Member FINRA/SIPC. LPL Financial representatives offer access
to Trust services
through The Private Trust Company N.A., an affiliate of LPL Financial, Inc. CA Insurance License #0E03441
|
