Regularly review who’ll receive your assets.
Do you know the meaning of the term “nonprobate assets?” These assets bypass more traditional estate planning vehicles, such as a will or revocable trust, and are transferred to family members through beneficiary designations. Nonprobate assets include IRAs, certain employer-sponsored retirement accounts, life insurance policies, and some bank or brokerage accounts.
If you’ve designated beneficiaries for certain assets, it’s critical to review your choices periodically. This is especially important after a major life change, such as a divorce or the birth of a child or grandchild.
Best practices
As you review your beneficiary designations, keep the following best practices in mind:
- Choose a primary beneficiary plus one or more contingent beneficiaries. Suppose your primary beneficiary passes away before you do. If you haven’t named a contingent beneficiary for an asset, the asset will end up in your general estate, potentially disrupting your intended distribution plan. Plus, assets that might otherwise be protected from creditors could lose that protection if transferred to your estate. To maintain control over your wealth and preserve protection from creditors, designate a primary beneficiary and at least one alternate choice. Also, avoid naming your estate as a beneficiary.
- Be prepared to change your mind in light of changing circumstances. Choosing beneficiaries isn’t a one-and-done deal. Failure to update beneficiary designations to reflect changing circumstances creates a risk that you’ll inadvertently leave assets to someone you didn’t intend to benefit, such as an ex-spouse. It’s also important to update your designation if the primary beneficiary dies—especially if there’s no contingent beneficiary or if the contingent beneficiary is a minor. Suppose, for example, that you name your spouse as the primary beneficiary of a life insurance policy and your minor child as the contingent beneficiary. Now, suppose your spouse dies while your child is still a minor. In that case, it’s advisable to name a new primary beneficiary to avoid the complications of leaving assets to a minor (such as court-appointed guardianship).
- Don’t overlook the impact on government benefits. If a loved one depends on Medicaid or other government benefits (a disabled child, for instance), naming that person as the primary beneficiary of a retirement account or other asset may disqualify the individual for those benefits. A better approach may be establishing a special needs trust for your loved one and naming the trust as the beneficiary.
- Consider whether relevant tax laws have changed. Changing tax laws can easily derail your estate plan if you fail to update your plan accordingly. For instance, the SECURE Act sounded the death knell for the “stretch” IRA. Previously, when you left an IRA to a child or other beneficiary (either outright or in a specially designed trust), distributions could be stretched over the beneficiary’s life expectancy, maximizing tax-deferred savings. However, the SECURE Act requires most nonspousal beneficiaries of IRAs to distribute the funds within 10 years after the owner’s death. Thus, in light of this change, you should review the designated beneficiaries for your IRAs and other retirement accounts.
Unintended consequences
No matter how carefully you plan your estate, inappropriate beneficiary designations for nonprobate assets can easily thwart your objectives. Avoid unintended consequences by reviewing your beneficiary designations regularly to ensure they’re still appropriate and align with your overall estate planning goals. Work with your professional advisors to determine whether you need to make any designation changes.
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