Ask investors to define estate planning and chances are they will paint a picture of long meetings and complicated forms. While advanced estate plans can be very in-depth, there is a way to simplify one’s estate planning process. Many investment products allow an investor to designate a beneficiary of the asset upon the passing of the investor. Proper use of this benefit can make one’s estate plan much more efficient.
Assets that allow for beneficiary designations include the following:
• Employer-sponsored retirement plans (ex. 401k)
• Life insurance policies
• Transfer-on-death investment accounts
• Pay-on-death bank accounts
• Stock options
• Executive deferred compensation plans
Keeping up with who is the beneficiary on these assets can be difficult. When you think of the consequences of having the wrong person named on the asset, it is well worth the effort.
Due to the importance of beneficiary designation, keep the following things in mind.
• Remember to name beneficiaries. Without the designation, assets can be tied up in probate court. This can cause delays, costs and unfavorable tax treatment.
• Name both a primary and contingent beneficiary. Most common here is to have a spouse as primary and a child as contingent. This allows for the asset to go to the child if the spouse has also passed away. If you only have a primary, consider if a charity you support should be the contingent.
• Update for life events. Events such as births, deaths, marriages, divorces, etc., are always happening. By reviewing this regularly, you can avoid unpleasant circumstances. Imagine an ex-spouse receiving your assets instead of your present spouse. This occurs more commonly than one would expect.
• Read the instructions on the beneficiary form before signing it. Not all forms are alike.
• Make sure your beneficiaries are in line with your will or trust documents. If the documents don’t coordinate, this could cause the whole probate process to be needlessly delayed.
• If at all possible, do not name your estate as the beneficiary. Sometimes an investor may not know who they want to put as their beneficiary and will name their estate as such. This should only be temporary and changed as soon the investor determines how they want their assets distributed upon their passing.
• Make sure your consult with your attorney and CPA before naming a trust as a beneficiary. Certain situations make a trust a viable option. They include if your beneficiaries are minors, if you are in a second marriage with children from both marriages, and if you wish to maintain control of the access to the assets. In any case, understand that tax consequences may be different for a trust than for an individual.
• Understand the tax consequences of naming a beneficiary of a particular asset. Not every asset has the same tax treatment.
• Make sure you talk to the beneficiaries about them being named as such and make sure it is ok with them. As strange as it sounds, some people designated as a beneficiary may not want the asset or may need the asset passed to them in a certain way. Everybody has their own circumstances and passing a large asset to them may complicate their situation. An example is a married couple is in the middle of divorce proceedings.
• Remember beneficiary designations take precedence over what you have specified in your will or trust.
• Beneficiary designations can help make an estate flow to the next generation much easier. However, they must be monitored and updated as part of a regular review with your wealth advisor.