As the New Year gets into swing, you no doubt made a few New Year’s resolutions. So did I. Besides losing weight, getting in shape, and the other usual suspects, you might have decided to get better organized. I’ve made that one too even though my office doesn’t indicate it when visitors walk in. One thing you might not think about checking on is your beneficiary designations. This will apply primarily to retirement accounts and life insurance contracts. Circumstances change throughout life with children born, couples divorcing, and other issues so it doesn’t hurt to make sure your beneficiaries are listed as you want them.
Let’s start with retirement accounts. This would include your 401(k) or other plan at work as well as your IRA accounts. Generally when you are designating beneficiaries, you designate one or more primary beneficiaries and then one or more secondary beneficiaries. For example, a husband might designate his wife as the 100 percent primary beneficiary and their two children as each being 50 percent contingent beneficiaries. Then, if the wife predeceases the husband, and the husband never gets around to updating his beneficiaries, the kids would still split the account 50-50. If a third child is born, you should update your account to give contingent beneficiaries one third each. While a will often contains language that additional children born are to be included in any distributions, beneficiary designations don’t include such language, so you need to update for the changed status.
For certain plans at your place of employment, your spouse is required to be your beneficiary unless they sign off and waive their rights as beneficiary. For example, in the case of a second marriage, you might want your kids to get your 401(k) proceeds instead of your spouse. Your spouse will likely have to sign off on that.
Speaking of second marriages, you should be aware that divorce does not automatically remove your ex-spouse as a beneficiary on your account. You have to take care of that with each account to which it may apply to, including your retirement plans at work and your IRA accounts. When designating beneficiaries for your IRA accounts, you should normally name individuals and should not name your estate as the beneficiary. That way, your beneficiaries can take distributions over their lifetime if they want to, thus spreading the associated tax liability over years into the future. If your estate is listed as the beneficiary of your IRA, the account will have to be liquidated within five years since estates don’t have a life expectancy that can be used as a distribution period. Liquidation of a large IRA within that time frame could create a tax liability that might have been deferred years into the future.
The same rules will basically apply to your life insurance policies. Whoever is named as beneficiary will get the proceeds. For example, suppose your will says that you want your spouse to get everything. But one of your kids happens to be listed as the beneficiary on an old life insurance policy. The beneficiary designation will control in that instance and the kid, not your spouse, will receive the proceeds.
Bank accounts don’t generally require you to designate a beneficiary. However, you could add a payable on death provision (POD) to the account. That way, upon your death, the account passes to the named person or persons without having to wait on a probate court to rule on distribution. The same feature is available on brokerage accounts but is generally referred to as a transfer on death provision, or a TOD. Both POD and TOD accounts will bypass the probate court process, resulting in a faster, more private transfer process.
While wills don’t determine distribution of assets on the above types of accounts (since they have beneficiary designations), this still might be a good time to review any will or trust documents you had drafted in the past. Again, circumstances in life change and you may need to revise some provisions. There have been substantial changes to the estate tax laws over the last ten years. These changes could impact the way your will or trust documents are currently drafted. It’s probably worthwhile to sit down with your attorney for a review if it’s been some time since they were drafted.
So this year I am going to get organized by checking my beneficiary designations and reviewing my legal documents. And if there is enough time left, I may clean up my office as well.
Published in the Texarkana Gazette on January 22, 2012.