The care and attention given to completing and submitting beneficiary designation forms is an essential aspect of your estate plan. The language in your estate planning documents may be the most clever or artful ever drawn, yet the plan could go awry because your various accounts do not have the correct, or even any, beneficiary designated. If no beneficiary is designated, or if the designated beneficiary is not alive, the account will pass through the probate estate of the deceased account owner.
Income tax-deferred retirement accounts deserve particular attention. Most often, it is advisable to have the account owner's surviving spouse be the primary beneficiary of these accounts. A surviving spouse can roll the account into a spousal IRA and defer taking the proceeds until he or she reaches the age of 70 1/2. If the surviving spouse is designated as the beneficiary, then he or she controls who receives the balance in the account at the time of the second death. If there are reasons why the surviving spouse should not be the outright beneficiary (because the account owner wants to control the beneficiary after the second death, for example), then it is possible to have the account beneficiary be a trust for the benefit of the spouse. When a trust for the benefit of the spouse is the beneficiary, there is no spousal rollover and the required minimum distributions must start coming out of the account and into the trust after the account owner's death.
Similarly, if adult children are to receive tax-deferred retirement accounts, it is ideal if the adult children are the direct beneficiaries. Each adult child will be able to individually decide how and when to take the required minimum distributions. If the children are not adults or if there are reasons why it is preferable to hold the proceeds of the tax-deferred retirement accounts in trust, then it is possible to have the beneficiary of the account be a trust. In all cases where tax-deferred retirement accounts are payable to a trust, it is critical that certain 'œboilerplate' provisions are incorporated into the trust to facilitate the payout of the tax-deferred accounts in a tax-efficient manner.
If charitable beneficiaries are part of an estate plan, the most tax-efficient assets to give to the charities are tax-deferred retirement accounts. Charitable organizations do not pay income tax, so if a charity receives a retirement account it gets 100 cents on the dollar. If an individual receives a tax-deferred retirement account, the individual must pay income tax on the funds as they come out of the account.
Many clients have been told that life insurance is tax-free. While it is true that life insurance proceeds are not subject to income tax when received by a beneficiary, life insurance proceeds are subject to estate tax. Given that each person currently has a $5,450,000 gift and estate tax exemption, the fact that life insurance proceeds are part of a person's taxable estate, for estate tax purposes, is of little significance for many clients. For clients who have large estates, it is possible for life insurance proceeds to be kept out of their taxable estates, for estate tax purposes. If the insured is not the owner or the beneficiary, the proceeds will not be part of the insured's taxable estate. For clients with large estates, it often makes sense to create an irrevocable trust to own the life insurance policy and to be the beneficiary of the life insurance policy.
The designated beneficiaries on each of your accounts need not be exactly the same, but each account must be considered and all account designations taken together must be consistent with your overall intent. After the beneficiary forms are submitted, it is advisable to follow through with the administrators of the accounts to make sure that the administrators have received and accepted the beneficiary designation forms.
Once you have considered the appropriate beneficiary for each account and sent in the completed forms, you can relax, at least for a little while. Just as a periodic review of your estate planning documents is recommended, you should also review the beneficiaries of your various accounts from time to time to confirm that they are still consistent with your overall estate plan.
If you have questions about the appropriate beneficiaries for your various accounts, feel free to contact the office and schedule a time to meet with Alyssa or me.