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 may assume that a last will and testament is the one official forum to express such decisions, that’s not always the case.
Often, an equally important issue is whom to name as beneficiary on life insurance policies, pension plan accounts and IRAs, since these assets are passed on independent of what may be spelled out in a will.
No matter who is designated, the beneficiaries generally 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 typically do not go through probate.
For many married individuals, a spouse will be the most logical beneficiary. A trust may be a better beneficiary choice, however, if a surviving spouse would not have the knowledge, time or comfort level to manage the insurance proceeds. A properly designed and executed life insurance trust can provide considerable advantages to you, your loved ones and your estate.
But trusts can be complex instruments, so be sure to consult with an estate planning professional with experience in setting up life insurance trusts to help ensure your peace of mind.
Also, remember to name contingent or secondary beneficiaries. This means that if the primary beneficiary has died, the insurance proceeds will go to the individual or trust named as secondary beneficiary. If there are no surviving beneficiaries, then the beneficiary is generally the insured’s estate, which means the death benefits will be 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 intestacy laws.
Pension Plans, IRAs
Generally, the law requires that the spouse be the primary beneficiary of a 401(k) or a profit-sharing account unless s/he waives that right in writing. A waiver may make sense in a second marriage — if a new spouse is already financially secure or if children from a first marriage are more likely to need the money.
Single people can name whomever they choose. And non-spouse designated beneficiaries of qualified retirement plans may be eligible for a “trustee-to-trustee” transfer to an inherited IRA, thus preserving the ability to stretch distributions over their life expectancies. Consult your tax adviser on how these rule changes may affect your situation.
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 and/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.
IRS rules provide that plans may allow non-spousal beneficiaries to stretch retirement plan distributions during the life of the beneficiary. Check with your employer, if necessary, to find out if this is an option under your plan prior to naming a child as a beneficiary.
A competent financial professional and/or tax adviser can also offer guidance as to whether this action may be appropriate for you.
Stay Up to Date
As you formalize or update your estate plan and will, it is important to review all beneficiary designations so your plan accurately reflects your current intentions. Remember that beneficiary designations could misdirect the intended flow of an estate, unless they’re kept up to date.
John E. Day is a financial consultant with LPL Financial Services, in Columbia. He can be reached at: 410-290-1000 [email protected] or on the web www.daywm.com.