When is the last time you reviewed the beneficiaries on your brokerage accounts, bank accounts, work retirement plans, annuities, and life insurance?
Improper beneficiary designations and failure to list beneficiaries create hardship for your family. They will need to hire an attorney and rely on the probate process to ensure those assets are distributed according to your will or trust, or according to the laws of the state in which you reside should you fail to have an estate plan in place (a.k.a. Intestate Succession). Did you list your minor children as beneficiaries of any assets, or could they inadvertently become the beneficiary? (Ask your attorney about Intestate Succession in your state…money doesn’t always go where you assume it would…especially if you leave a spouse AND children behind.) Those assets are headed for conservatorship (what happened to Britney Spears), and surprise, when your child turns 18 they’ll get all the money outright…which I’m sure they’ll invest wisely and use to pay for their vocational training or college education given their significant level of maturity. And in case you were wondering, conservatorships aren’t free.
Additionally, many people are surprised to find out the terms of their estate planning documents, like a trust or will, do not always govern the beneficiaries of their accounts. For example, when you signed an IRA application, you should have been required to list specific beneficiaries on the account application. You probably also ignored the tiny print in the 90-page document listing default beneficiaries if none are listed, or if your beneficiary form fails to adequately provide for whatever unforeseen circumstance arises, such as a deceased beneficiary. Consequently, the beneficiary could be an estranged family member, someone who shouldn’t be receiving assets outright, such as a person with special needs who relies on government benefits…or even your ex-spouse if you forgot to change your beneficiary after a divorce.
Here are some important tips for handling your beneficiaries:
- Gather the documents listing your beneficiaries. Your financial advisor should be able to provide a lot of this information. Contact your work plan administrator, or log into your benefits website to determine the beneficiaries on your work retirement plans. Look at the registrations on your bank accounts- do you see “TOD” or “POD” listed anywhere? If not, you may not even have a beneficiary listed.
- Meet with your estate planning attorney. (Find one if you haven’t already done so.) Determine how your beneficiaries should be listed to fit into your overall estate plan. Your attorney should provide beneficiary designation instructions when they finalize your plan. Quite frequently, people with trusts assume they should simply name the trust as the beneficiary of their retirement plans (e.g. IRAs, 401(k)s), annuities, or life insurance policies. Listing a trust as the beneficiary of a retirement plan can have disastrous tax consequences for beneficiaries if the trust is not properly structured. Very precise language must also be used on the beneficiary form. Unforeseen tax consequences can also arise when naming a trust beneficiary of an annuity or life insurance policy. Improper trust drafting and beneficiary designations can also negatively impact a beneficiary with special needs who relies on government benefits.
- Be sure to review your beneficiaries on a regular basis, especially if you have a significant life event take place such as marriage, divorce, birth of a child, death of a family member, or it becomes clear your child should not inherit money outright. We review beneficiaries in every meeting with our clients. We also stay in constant communication with their attorneys to make sure that not only their wishes are carried out, but they are carried out in a way to maximize tax savings and protect their loved-ones.
Your estate planning attorney should be well-versed in retirement benefits planning and understand the complexities of annuities and insurance. Your attorney and financial advisor should work together to make sure your estate plan is implemented. A lot of the real work takes place after you leave the attorney’s office. This is the work that keeps those assets out of probate!
Do what you can to minimize the stress of an already difficult time in the lives of your family members. Proper estate planning and execution will save them time, money, and unnecessary complications. We are here to help you navigate the complexities of ensuring that your hard work and legacy are preserved.
HighTower Advisors does not provide tax or legal advice. This material was not intended or written to be used or presented to any person or entity as tax advice, tax information, legal advice, or legal information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor regarding any recommendations.
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