More and more of us recognize the need for careful, methodical estate planning. We prepare our wills and trusts. We labor over who should be guardians for our children and who should be trustees and executors. We decide how and when our children or other loved ones should get what we leave behind. However, all too often people who thought they had it all planned fall into a hidden trap: improper beneficiary designations.
Beneficiary designations govern many of our most valuable assets, including life insurance, retirement plans, bank accounts, mutual funds, brokerage accounts, and sometimes even automobiles. Retirement assets alone account for $10.9 trillion, according to statistics from the Investment Company Institute and the Federal Reserve Board. Beneficiary designations direct those assets notwithstanding contrary provisions in a will or trust.
Often we fill out beneficiary designations when we are not thinking about our overall estate plan. A great example is the beneficiary designation for our retirement plan assets. We start a new job and the human resources department gives us a stack of papers to read and another one to sign. We sign that we received the policy manual. We sign what our tax withholdings should be. We sign forms for health, life, dental, and disability insurance. We sign a form directing what should be withheld for retirement and how it should be invested. Finally, we sign a form that indicates to whom retirement plan assets should go upon our death. By this time, we are exhausted from filling out forms and we may not give this as much thought as necessary. This designation stays in effect until completion of a new form.
Beneficiary designations usually are not affected by a change in life circumstances. If you started your job right after college and named your college boyfriend or girlfriend, he or she remains your beneficiary even if you are now married and have children. This might be fine if you married the boyfriend or girlfriend. However, if you ended that relationship and married someone else, your spouse could be in for a rude awakening at your death when your old flame gets all your assets.
If you never got around to filling out the appropriate forms, or if the person you designated, like a parent, died before you and there were no backup or contingent beneficiaries designated, the assets would go to your estate. This would bring the assets back under the control of your will. However, this creates two additional problems. First, the assets would be subject to a probate proceeding. This is a public proceeding that can be time consuming and expensive. Second, this causes an acceleration of the income taxation of retirement plan assets and does not allow the surviving spouse to do a “rollover” of the assets.
Comprehensive Estate Plan
Analysis of beneficiary designations is an important part of a comprehensive estate plan. Careful coordination of beneficiary designations with a revocable trust can ensure that your assets go to whom you intend. Further, such coordination allows for the deferral of income taxation until long after your death. A qualified estate planning attorney can help you prepare a comprehensive estate plan.