While the execution of wills requires formalities like witnesses and a notary, the reality is that most property may pass through other, less formal means.
Joint ownership of assets such as bank or investment accounts allows survivors to take ownership rather seamlessly. Other banks and investment companies offer payable on death accounts that permit owners to name the person or people who will receive proceeds when the owners die. Life insurance, of course, permits the owner to name primary and contingent beneficiaries.
If taking advantage of these simplified procedures, however, owners need to be sure that the decisions they make are consistent with their overall estate planning. It’s not unusual for a will to direct equal division of an estate, but the reality of joint accounts or beneficiary designations makes for unequal distribution.
It’s also important to review beneficiary designations frequently to make sure that they are still correct. An out-of-date designation may leave property to an ex-spouse or to people who died before the owner.
Other considerations are paramount when dealing with retirement plans, whether IRAs, SEPs or 401(k) plans, because the choice of beneficiary can have significant tax implications.
Following are some general rules when designating retirement account beneficiaries:
- Name your spouse, usually. Surviving spouses may roll over inherited retirement plans from their spouses into their own plans. This means they can defer withdrawals until they reach age 70 1/2 and take RMDs based on their age. Non-spouses of retirement plans must begin taking distributions immediately (though they can base them on their own presumably younger ages).
- Spouse not ALWAYS better. For example,
- He or she is incapacitated and can’t manage the account
- Doing so would add to his or her taxable estate
- You are in a second marriage and want the investments to benefit your first family
- Your children need the money more than your spouse
- Consider a trust. In a number of the above circumstances, a trust can solve the problem, providing for management in the case of an incapacitated spouse, permitting assets to benefit a surviving spouse while being preserved for the next generation, and providing estate tax planning opportunities.
- But check the trust. Most trusts are not designed to accept retirement fund assets. If they are missing key provisions, they might not be treated as “designated beneficiaries” for retirement plan purposes. In such cases, rather than being able to stretch out distributions during the beneficiary’s lifetime, the IRA or 401(k) will have to be liquidated within five years of the decedent’s death, resulting in accelerated taxation.
- Consider special needs planning. It can be unfortunate if retirement plans pass to individuals with special needs who cannot manage the accounts or who may lose vital public benefits as a result of receiving the funds. This can be resolved by naming a special needs trust as the beneficiary of the funds, although this gets a bit more complicated than most trusts designed to receive retirement funds.
- Keep copies of your beneficiary designation forms. This not only allows you to review more easily periodically, but this estate-planning attorney requires review of these documents to ensure cohesive planning.
- But DO name beneficiaries! The biggest mistake many people make is not to name or update beneficiaries at all. This means that the plan will have to go through probate at some expense and delay.
In short, wills are important, in large part because they name a personal representative to take charge of your estate, can name guardians for minor children and they, in writing, memorialize the will of the decedent. However, they are only a small part of the picture. A comprehensive plan needs to include consideration of asset titling and beneficiary designations.
This article is written by an attorney at Wyatt & Mirabella, PC. Always consult an attorney before making any legal decisions. To make an appointment today for a free consultation, please click here to contact us.