In many cases a will or living trust has no effect on some of your important assets such as life insurance and a 401 (k) account. Your beneficiary designations control who receives those assets and, without a careful review, the majority of your estate may not pass the way that you intended it to - even with a valid will or trust.

A comprehensive estate plan includes beneficiary designations that fall outside of your will and trust but are part of your overall estate plan.

You want each part of your plan to work effectively and efficiently to save your estate the most money and to fulfill your intentions.

5 Things Everyone Should Know About Beneficiary Designations

1. Make Sure You Name Beneficiaries. The assets that pass through beneficiary designations are not subject to probate. If you fail to name a beneficiary, the asset becomes part of your probate estate and could lead to additional delays or administrative costs. Name both primary and contingent beneficiaries so you have a back up beneficiary in case the primary beneficiary dies before you. Be sure to talk with your estate planning attorney about your beneficiary designations. It is important to understand how all the different parts of your estate plan work as a whole. UPDATED NOTE: This is especially true for IRA and retirement account beneficiary designations.  If no beneficiary is named (and the form must be submitted to the custodian of the plan) then there can be very negative income tax implications.  UPDATED NOTE 2: Since the Clarke case, be sure to consider using a trust to protect your heirs from losing the inherited IRA in the event of a lawsuit.  Note, however that these trusts (conduit or accumulation trusts) require special provisions so don't attempt this on your own.  Get legal and tax advice.

2. Update After Life Events. Review and update your beneficiary designations after life events such as birth, death, marriage and or divorce. You do not want an ex-spouse to receive your assets. This is also a great time to update your estate plan including your will and trust so that you have the right people in the right places to receive your assets.

3. Understand Both The Tax and Non Tax Consequences of Naming Specific Beneficiaries for Particular Assets. Lets say you have two accounts and name each of your children under one of the accounts. The accounts may grow differently and one beneficiary will get more and one will get less. Make sure what you intend is actually what will happen.

4. Use Caution Naming a Trust as Beneficiary. Consult your attorney before naming a trust as beneficiary for things like an IRA and qualified retirement plans or annuities. The governing document or tax law may require accelerated taxable distributions. In certain circumstances this may make sense like when your beneficiaries are minor children and if you want to control access to the funds. Be sure to understand the tax implications of doing this.

5. When You Change Jobs Consider Rollover Options. For a non-spousal beneficiary of a qualified retirement plan or profit sharing plan if he or she does not transfer the assets within a year of death the distribution options will be limited to those in the qualified plan and they may not be able to stretch out distributions over their life expectancy. If this occurs, the beneficiary will have to keep in contact with your former employer and their human relations department to manage assets and withdrawals. Rolling assets into an IRA can simplify this process and allow the beneficiary more investment options and more control.

Beneficiary designations, while not in your will or trust, are an important component of your comprehensive estate plan. Your estate plan, as a whole, should minimize your tax and other liabilities and maximize your individual intentions. Beneficiary designations, like a will and trust, are important to make these things happen.


6. Who Pays The Tax?  Be sure to talk to the lawyer drafting your will or trust about the tax clause.  You may not want your heirs to have to withdraw funds from an IRA or 401(k) to pay the inheritance taxes on these accounts (as that would trigger more income tax).  In some cases, the will or trust might direct the executor or trustee to pay the inheritance taxes from the estate or trust rather than from the retirement account.  Put that on the agenda when you meet with your lawyer.

For an appointment to review or update your estate plan call Dave Frees and his estate planning team at 1-888-573-7407 

For our Executor report: The Ten Most Common Mistakes Executors Make... and How to Avoid Them click here. 

David M. Frees, III
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Attorney, Speaker and Author
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