Coordinate Your Beneficiary Decisions
by Douglas J. Dehn
Spring 2010 BGS Newsletter
Did you realize that having a Will or a Trust does not complete your estate planning work? Almost everyone has a life insurance policy, an IRA, or a 401(k) or similar retirement plan, a bank account or a stock or mutual fund portfolio. Beneficiaries can be named for all of these assets.
The beneficiaries you name in a Will or a Trust may or may not be the same beneficiaries you want to name with these other types of assets. I bet that 90% of my clients do not have copies of plan documents that name their beneficiaries.
Company beneficiary forms come in all shapes and sizes. Some do not easily allow alternate (contingent) beneficiaries. Most companies want simple designations that can be easily computerized. Qualified retirement plans (plans where you obtained a tax deduction) are governed by the federal ERISA law. Special written spousal consent forms may be needed. In general, company beneficiary formats may not allow detailed or complex contingent beneficiary provisions.
In some cases, the owner’s estate or testamentary trust or living trust should be named the contingent beneficiary. This would allow the person’s estate or trust to use these funds in a plan for (1) a child’s education; (2) a plan to delay distribution to a child later than age 18; or (3) a tax saving disclaimer plan. Important income tax issues arise, however, where an owner desires to control qualified retirement plan funds to fund those customized plans. A balance must be struck between the loss of the advantage of the extended payout rules available to “individual” child beneficiaries and control over distributions. Naming a child or grandchild directly as an alternate beneficiary in a qualified plan allows the beneficiary to withdraw the funds out of that IRA or 401(k) type asset, usually at lower tax rates over the lifetime of the beneficiary. A lump sum distribution to an estate or trust would usually result in a higher overall income tax, assuming that the beneficiary would not elect to take a lump sum anyway.
Plans and policies may have “default” provisions that you do not want, passing your funds to someone other than whom you really wanted. Beneficiaries or contingent beneficiaries may predecease you or die in an unusual order. Would you want an ex spouse to remain as a beneficiary? If the default provisions are not acceptable to you , you must keep your beneficiary provisions updated.
Remember that no asset can be distributed directly to a minor child. Most companies require that a guardian or conservator be appointed for a minor child (even if there is a surviving parent) before funds are distributed. Naming a Trust as a beneficiary may avoid guardianship or conservatorship, at least for the distribution of funds from that plan.
Careful thought should be given to beneficiary designations. Just because you can name a beneficiary doesn’t necessarily mean it is an easy decision. You should create a file system identifying each plan and what benefits are payable under that plan. You should always know who the beneficiaries and alternates of each plan are. Obtain a copy of those designations from the company. Determine if your current designations are proper and still desired. Think through what you want done if there are or could be minor beneficiaries or a family disaster. This organization will help your chosen loved one deal with your affairs after you are gone.
An adviser’s help is often useful in the important coordination of beneficiaries between your Will or Trust and your “non-probate/beneficiary driven” assets. Barna, Guzy & Steffen has helped its clients with these matters for over 70 years. Give us a call when you are ready to discuss these issues.
