Many investments allow an investor to name a beneficiary of the asset upon death. The proper use of this benefit can make a person’s estate plan much more efficient, says the Tupelo (MS) Daily Journal in the recent article, “A simple way to simplify estate planning.”
The type of assets that permit beneficiary designations include employer-sponsored retirement plans (ex. 401k), IRAs, life insurance policies, annuities, transfer-on-death investment accounts, pay-on-death bank accounts, stock options and executive deferred compensation plans.
Remembering who the beneficiary is on these accounts can be difficult. However, when you consider the consequences of having the incorrect person named on the asset, it’s well worth the effort. Due to the importance of the beneficiary designation, note these reminders:
- Designate beneficiaries. Without this, assets can be tied up in probate court, resulting in delays, costs and unfavorable tax treatment.
- List a primary and contingent beneficiary. It is common to have a spouse as primary beneficiary, and a child as contingent, which lets the asset pass to the child, if the spouse has also passed away. You can also name a charity you support to be the contingent.
- Keep things up-to-date. Any time there’s a birth, adoption, death, marriage or divorce, you should review your accounts and polices.
- Go through the instructions on the form before signing it. Beneficiary forms can vary, so review each one.
- Coordinate your beneficiary designations with your will or trust documents. If they don’t, it could cause the probate process to be delayed.
- Work with an estate planning attorney before naming a trust as a beneficiary. Tax consequences may be different for a trust than for an individual, so some situations make a trust a wise option.
- Know the tax consequences of naming a beneficiary of a particular asset. That’s because every asset does not have the same tax treatment.
It’s also important to remember that beneficiary designations trump any instructions you’ve specified in your will or trust. Beneficiary designations can help make an estate flow to the next generation much more efficiently. However, you must keep an eye on them and keep them up-to-date, as part of a regular review with your attorney.
Beneficiary designations are an important part of estate planning. However, they do not protect you in case of incapacity. If you become incapacitated, you will need to have documents designating who will manage your financial assets (like a Trust and Power of Attorney) as well as health care (an Advanced Health Care Directive). Without these, if you become incapacitated, your loved may have to petition the court for control of your assets in a procedure called conservatorship.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: Tupelo Daily Journal (November 2, 2018) “A simple way to simplify estate planning”