Is it Time to Check Your Beneficiary Designations?

This is the time of year when we see a lot of new clients who are following up on their New Year’s resolutions to create or update their Living Trusts.

But when was the last time you checked to see whom you named as the beneficiary on your retirement account, life insurance policy, or annuity? You’d be surprised at the number of people who have prior spouses or deceased relatives still named as beneficiaries on retirement accounts at former employers, or on life insurance policies purchased long ago and forgotten.

Updating a beneficiary designation: It supersedes your Will or Trust

The beneficiary designation is a legally binding document that supersedes your Will or Trust; neither will override the person you have named as your beneficiary in a life insurance policy, annuity or retirement account.

If something had happened to our client, his ex-wife would have inherited most of his assets

This story, unfortunately, is not that uncommon. It illustrates the importance of periodically reviewing your Trust allocations. Our client hadn’t reviewed his Trust in more than eight years, and he was shocked to discover that if something happened to him, all of his assets, exclusive of the home he held with his current wife, would go to his ex-wife, who was still identified as his Successor Trustee, his Power of Attorney and Agent for his Advance Healthcare Directive. We scheduled an appointment to completely rewrite his Living Trust. 

A forgotten 401k plan beneficiary update results in husband’s receiving all of wife’s assets

Another client’s wife had worked for a large multinational for many years. It was a second marriage, and when she became seriously ill with cancer, she created a Living Trust. She wanted her two children and husband to each get one-third of her assets. However, she failed to update her beneficiary designation for her 401k plan, so that sizeable account went directly to her husband. He wanted to honor her wishes, but if he cashed in the 401k and paid it to the kids, he would have taken a huge hit on his taxes.

He and the kids set up an IRA in his name, and the kids were named as the beneficiaries. They agreed that, with each distribution he made to them, he would withhold enough to cover the taxes. While this ultimately worked out, it would be an ongoing administrative hassle. It could have been avoided by updating the retirement plan beneficiary form at the wife’s employer. When identifying your primary beneficiary, you should also name a contingent beneficiary. In this way, if the primary beneficiary predeceases you, you have already specified who should inherit the account.

A Living Trust is an important part of estate planning, and our comprehensive Trust package includes a Power of Attorney and Advance Healthcare Directive. Schedule an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.

5 Things You Need to Know about Beneficiary Designations

When creating Living Trusts, most of us know that we need to identify our beneficiaries and the way in which we distribute our assets among them. But something that not infrequently happens is that someone will name a beneficiary in a Will or Living Trust without regard to the beneficiary designation for the individual accounts. When creating Trusts, we remind our clients to make sure their beneficiary designations have been updated to reflect their preferred beneficiary.

Transfer on death assets

Assets that are registered as “transfer on death” or “payable on death”–retirement plans, life insurance policies, IRAs and annuities–automatically pass to beneficiaries when you die, avoiding a legal proceeding.

Here are 5 things you may not know about your assets and beneficiary designations

1. Your beneficiary designation takes precedent over your Will. 

This is especially important if you remarry and forget to change old beneficiary designations. In the case of one recent client, he remarried and updated his Trust so that if anything happened to him his new wife would inherit his assets. What he didn’t realize, however, was that if he died, it would be his ex-wife who would inherit his life insurance policy and brokerage accounts because he hadn’t changed the beneficiary designations.

2. Consider the tax consequences for your beneficiary

If you designate someone other than your spouse as a beneficiary, the amount will be counted as your taxable estate and may push you above the estate-tax limit. Inherited assets will be included in their estates as well, which could push them over the tax exclusion limit.

If you leave company retirement plan funds to someone other than your spouse, they may have to take distributions and pay tax on those distributions. A spouse could roll over those assets into an IRA.

3. The custodian (bank, insurance company, etc.) must have your beneficiary form on file. 

If the custodian of your account does not have your beneficiary on file, legally there is no beneficiary at all.

4. Some assets/accounts can cost your beneficiaries a lot of money if they pass through the estate

An IRA with a designated beneficiary, for example, is protected from creditors when the owner dies. If it passes through the estate, it can be used to pay the decedent’s debts.

5. Consider beneficiaries with special needs

Those who have dependents with special needs may be taking advantage of  government benefits to provide for their wellbeing. Their eligibility for these benefits may be adversely affected if assets are bequested to them directly.

Creating a Special Needs Trust can ensure that these dependents keep their government benefits, remaining eligible to receive additional support from an inheritance.

We encourage our clients to update their Living Trusts with major life changes—those things that might affect an inheritance—birth, death, marriage or divorce. This is a good time to make sure account designations are up to date as well.

Contact California Document Preparersat one of our three Bay Area offices today to create a Living Trust. Our dedicated team is helpful, compassionate and affordable.