You Are My Sunshine – My Only Sunshine
Happy Summer Solstice! I just returned from a wonderful week at Lake Michigan with my family. I love them dearly and a great way to look after them is to make sure I have beneficiaries named on my accounts. Beneficiary designations are the way that certain types of assets are passed on to heirs, regardless of a will or any other estate planning documents.
Proper Estate Planning Includes Beneficiary Designations
Beneficiary designations are the primary method of transfer for many of your important assets. When we say primary, we mean that the beneficiary designation will take precedence over your Will for a select group of your assets. There have been instances where an individual gets divorced, changes their estate planning documents, but because they forgot to change their beneficiary designations leaves assets to their ex-spouse upon passing. An individual’s beneficiary designations are a critical component of complete estate planning that should not be overlooked or ignored.
Important Assets Use Beneficiary Designations
For many of our clients, one of largest, if not the largest asset they own is their retirement account. It may take the form of a 401k, Individual Retirement Account, 403(b) etc. No matter what the form of the retirement account, they all have one thing in common. They use a beneficiary designation form as their primary means of transfer when the owner passes away. The use of the beneficiary designation form also means, that one of your largest assets is going to pass outside of their traditional estate planning documents. This makes it important that the estate planning attorney work in conjunction with the client and your financial advisor to make sure their beneficiary designations are consistent with their wishes under the estate plan. Failure to take into account the beneficiary designations forms would leave a large hole in your estate plan, possibly leaving the retirement accounts to the wrong person. Even worse, the failure to properly complete the beneficiary designation forms on retirement accounts could result in punitive tax consequences.
We also suggest that brokerage accounts, bank accounts and potentially even your home be under a “transfer on death” provision. These are very similar to a beneficiary designation and will save your family from a lengthy and expensive probate process for these accounts.
Who Should be Designated as a Beneficiary
Your beneficiary designation, like your estate plan should contain a primary beneficiary and a secondary (contingent) beneficiary. The primary beneficiary is the person or persons you would want to receive the assets if something happened to you. The secondary beneficiary is the person or persons you would want to receive the asset if something happened to you and the primary beneficiary was deceased. It is always a good idea to name a secondary beneficiary. The secondary beneficiary prevents the transfer of the account to the decedent’s estate which can have punitive tax consequences.
Reasons to Make Changes
Just like your financial plan you should be reviewing your beneficiary designations over time. The main reason people make changes to their beneficiary designations are life changes. This could be a marriage, a divorce or the death of a spouse. It might also include the birth or adoption of a child.
If you were to become divorced and then remarry but did not adjusted your beneficiary designation to reflect your new spouse, then your ex-spouse would likely still inherit the account.
Another reason might be changes in the rules that make a beneficiary change more advantageous. For example, the SECURE Act passed at the end of 2019 made changes in the timing of when most non-spousal beneficiaries must withdraw funds from inherited IRAs. This drastically changes the amount of the tax liability for many of these beneficiaries. Changing the account’s beneficiary designation from one or more of the client’s adult children to their spouse or to another beneficiary not impacted by these rule changes might make sense.
An individual might accumulate sufficient assets beyond their retirement accounts to meet their needs and the needs of their heirs upon their death. If the person has charitable inclinations, they might consider making one or more charities the beneficiary of their IRA or other retirement accounts. This is often a much more tax-efficient means of donating assets than taking a distribution from the account and then giving the cash to the charity.
