Most of us lead hectic lives, but as part of an estate plan, it is important to take the time to designate or update beneficiaries for all of your assets. Notably, you should be aware that designations for retirement plans and life insurance policies supersede beneficiary dispositions in your will. Keeping that in mind, here are several practical suggestions.
Don’t leave the beneficiary lines blank.
If you don’t name specific beneficiaries for your accounts, or if you name your estate as the beneficiary, your heirs will likely end up in probate court. This can be both time-consuming and costly. If assets go to your estate, they are subject to creditors. Your best option is to choose individual beneficiaries and list them on the forms.
Use trusts for beneficiaries who are minors.
In some states, minors face restrictions until they turn age 18 or 21. If you designate a minor as a beneficiary, a court will appoint a guardian to manage the funds until the child reaches the age of majority. Alternatively, you might establish a trust to handle the funds and name the trust as the beneficiary. Thus, you maintain control now and provide asset protection for minors when you’re gone.
Understand the key rules.
Other than your spouse, beneficiary designations on retirement accounts and insurance contracts will override your will. If you want someone besides your spouse to inherit assets, your spouse must sign a written waiver. Without the waiver, a non-spouse beneficiary designation will be invalid upon your death.
Inform your beneficiaries.
Do not keep your designations a secret. Also, let them know where to find important documents and contact information for your professional advisers. On the other end, make sure your advisers have the vital contact information.
Double-check names and numbers.
Make sure they are spelled correctly and that figures are accurate. This is particularly important when listing Social Security numbers, telephone numbers, and addresses.
Use percentages instead of dollar amounts.
For example, suppose you have an IRA worth $100,000, and you designate a niece as a beneficiary of $75,000 of that amount. If the IRA drops in value to $75,000 or below at your death, your niece gets the entire amount—any remainder beneficiaries receive zero. Perhaps a better way to meet your objectives is to give your niece 75% of the overall account value.
Name contingent beneficiaries.
If your primary beneficiary has died and you haven’t named a replacement, the assets would go to your contingent (or “secondary”) beneficiaries. Without a contingent beneficiary, the assets are transferred to your estate (see above). Avoid potential problems by indicating contingent beneficiaries in appropriate places.
Don’t just stuff all the paperwork in a desk or drawer and forget about it. Reviewing and updating your beneficiary designations periodically ensures that your assets will pass to your designated beneficiaries and achieve your objectives without any problems.
For more information about the above article or any other individual tax planning matters, contact Lesley L. Price, CPA at (334) 887-7022.