Two Words Could Undo Your Entire Estate Plan

No one relishes the idea of planning for their own death, but the alternative of not planning and leaving your family members to sort out an expensive mess is a poor way to be remembered. According to a recent article from Kiplinger, titled These 2 Words Could Send Your Retirement Money to the Wrong Beneficiary,” this information could save you from accidentally cutting someone out of your will.

First, always be sure the beneficiary designations on your retirement accounts, insurance accounts and any other accounts that permit you to have a named beneficiary, match up with your will and your wishes. Property and assets outside of your retirement accounts will be distributed by other estate planning tools, like trusts, or TODs (Transfer on Death) for jointly held assets. If you don’t make plans otherwise, most of your estate will go through probate. It’s can be expensive and time consuming, but with the right planning, it can be avoided.

Most people name their spouse as the primary beneficiary on their retirement account. If you don’t wish to do this, you may have to fill out paperwork and have your spouse sign a waiver agreeing to this. Federal law protects spouses, when it comes to certain types of retirement accounts, and ensuring that spouses receive each other’s retirement accounts is important, unless waived. After naming your primary beneficiary, you name contingent beneficiaries. If you are married and have children, it’s likely that your children will be your contingent beneficiaries. No children? In that case, a niece or nephew or other family member is usually named. By the way, if you want to give to charity, then retirement funds are the perfect asset to give.

The next decision to make is the key one: per stirpes or per capita. This step is often missed, because it’s not used on every asset form. Per stirpes is a Latin legal term that simply means if your primary beneficiary dies before you die, their next of kin inherits your assets. The alternative is per capita. By choosing per capita, your money only goes to your primary beneficiaries.

Here’s an example of how per capita might work.

Imagine a grandmother, daughter and granddaughter. The daughter is the primary beneficiary on the grandmother’s retirement account, but the grandmother forgets to name a contingent beneficiary.

If the daughter dies before the grandmother and the daughter is still listed as the primary beneficiary when the grandmother dies, the money won’t go the granddaughter. The money will go through probate and the court would decide who receives the money. Had the grandmother selected per stirpes, the money would have gone straight to the granddaughter, even if she were not listed as a contingent beneficiary. When you choose per stirpes, the next of kin to your primary beneficiary (or your heir’s heirs) receive their share of your property.

This is how per capita works. Per capita ensures that your money goes to your primary beneficiaries only. Per capita is also typically the default option most retirement savers have in place right now.

Depending on how you want your inheritance handled, it’s easy to see how this could be a costly estate planning mistake.

Reference: Kiplinger (July 30, 2020)These 2 Words Could Send Your Retirement Money to the Wrong Beneficiary

Ignoring Beneficiary Designations Is a Risky Business

Ignore beneficiary forms at your and your heirs’ own peril, especially when there are minor children, is the message from TAPintoChatham.com’s recent article “Are You Read to Deal with Your Beneficiary Forms?” The knee-jerk reaction is to name the spouse as a primary beneficiary and then name the minor children as contingent beneficiaries. However, this is not always the best way to deal with retirement assets.

Remember that retirement assets are different from taxable accounts. When distributions are made from retirement accounts, they are treated as Ordinary Income (OI) and are subject to the OI tax rate. Retirement plans have beneficiary forms, which overrule whatever your will documents may state. Because they have beneficiary forms, these accounts pass outside of your estate and are governed by their own rules and regulations.

Here are a few options for beneficiary designations when there are minors:

Name your spouse as the primary beneficiary and minor children as the contingent beneficiaries. This is the usual response (see above), but there is a problem. If the minor children inherit a retirement asset, they will need a guardian for that asset. The guardian named for their care and well-being in the will does not apply, because this asset passes outside of the estate. Therefore, the court may appoint a Guardian Ad Litem to represent the child’s interest for this asset. That could be a paid stranger appointed by the court, until the child reaches the age of majority, usually 18 in most states.

Elect a guardian in the retirement plan beneficiary form. Some custodians have a section of their beneficiary form to choose a guardian for minor. Most forms, unfortunately, do not provide this option.

Make your estate the contingent beneficiary of the retirement account. While this would solve the problem of not having a guardian for the minor children, because it would kick the retirement plan into the estate, it may lead to adverse tax consequences. An estate does not have a measuring life, so the retirement asset would need to be fully distributed in five years.

Leave the assets to the minor children in a trust. This is the most effective means of leaving retirement assets to minor children without terrible tax consequences or needing to have the court appoint a stranger to oversee the child’s funds. Your attorney would either create a separate trust for the minor child or build a conduit trust under your will or a revocable trust to hold this specific asset. You would then change your beneficiary form to make said trust or sub-trusts for each minor child the contingent beneficiary of your retirement plan. This way you control who the guardian is for this asset for your minor child and are tax efficient.

Whichever way you decide to go, speak with an experienced estate planning attorney to determine which is the best plan for your family.

Reference: TAPintoChatham.com (Sep. 8, 2109) “Are You Read to Deal with Your Beneficiary Forms?”