A common misconception in estate planning is that all of your assets will pass according to your will. While a will governs your probate property, many assets pass outside of probate by virtue of a beneficiary designation, including:
- Life insurance proceeds
- Pension benefits
- Employee death benefits
- Retirement plan or retirement account (401(k), IRA, etc.) proceeds
Considering each of these types of assets could make up a substantial portion of one’s estate, it is crucial to keep the following things in mind:
1. Review beneficiary designations
Be sure that your beneficiary designations reflect your wishes. Contact your current and former employers, your investment advisor, and your life insurance agent for the required paperwork to make any changes, if necessary.
2. File updates properly
Do not make the mistake of assuming a change in your circumstances, like a remarriage, will make a prior designation null and void. Always make beneficiary changes on the correct paperwork specific to the financial institution.
3. Backup beneficiaries
Include both primary and contingent beneficiaries for your accounts. If your primary beneficiaries die before you, without a backup beneficiary, the account or death benefit would be paid to your estate. This can result in unnecessary fees and delays associated with probate, as well as accelerated taxes.
4. TOD and POD designations
Investments and cash accounts typically go through probate and are distributed in accordance with your will, but you can avoid probate on these by establishing beneficiaries with Transfer on Death (TOD) or Payable on Death (POD) designations.
5. Beneficiaries with special needs
Relatives with special needs or disabilities rarely inherit directly. Receiving an inheritance outside of a special needs trust could mean the loss of valuable government benefits.
6. Spouse vs. non-spouse beneficiaries
A spouse who inherits a retirement account has several options for deferring income taxes until the money is needed, but a non-spouse beneficiary must withdraw the entire account balance and pay income tax on those withdrawals within a 10-year window.
7. Naming trust as beneficiary
Naming a trust as the beneficiary of your retirement accounts may allow an extra degree of control and protection, but be aware of the tax impact.
8. Naming a qualified charity as beneficiary
Funds designated to a qualified charity allow for the tax-free transfer of assets directly to the specific organization. This can be especially tax-advantageous for retirement account distributions upon death.
9. Attorney to determine strategy
An estate attorney may not be able to designate beneficiaries for you, but they can help you determine the best strategy for doing so within the overall context of your estate plan.
While having a will in place is an important part of any estate plan, naming beneficiaries on certain accounts can be just as important. The Odyssey Group works to ensure our holistic planning incorporates beneficiary reviews for a client’s probate and non-probate assets.
