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Do you have any life insurance policies, retirement plans (from a current or former employer), or an Individual Retirement Accounts (IRA)? If so, when was the last time you checked the beneficiary designations for those policies or accounts? Odds are, it’s been awhile. What you may not know is that these types of assets do not pass according to your will. Rather, you designate who will receive these assets by naming one or more beneficiaries on a beneficiary designation form. Because the beneficiaries you designate for these assets can have drastic effects on your Houston estate plan, there are some things you need to consider when completing these forms for the first time as well as when you update them. A recent article in Morningstar, titled “How to Handle Beneficiary Designations”, provides some pointers on what you need to consider, such as:
- Know the basics. As a general rule, for assets that require beneficiary designations, you can name any individual or entity as a beneficiary. For instance, you can name your spouse, your children, or other individuals, a charity, or a trust as the beneficiary. However, it is generally not a good idea to name individuals who are minors as beneficiaries, as it would most likely be necessary for a probate court to create a trust to manage the assets for the child until he or she reaches the age of eighteen. For children, a better approach is often to have a trust created in your Will (known as a “testamentary trust”) and to name the trustee appointed in your Will as the beneficiary of the policy or plan. However, naming trusts can have varying income tax effects, so you should speak to your Houston estate planning attorney before naming a trust as a beneficiary.
- Keep your designations up to date. You should review your beneficiary designations every few years to ensure that they still reflect your wishes and are coordinated with the rest of your estate plan. You should also check your beneficiary designations if you or your employer switches retirement plan providers or insurance companies, since your prior designations may not carry over from the previous plan.
- Consider the tax consequences. The estate tax and income tax consequences can vary greatly depending on who is named as the beneficiary of your life insurance policies and retirement plans. You should speak with a qualified estate planning attorney who can explain the estate and income tax treatment of these assets upon your death.
- Consider any special needs beneficiaries. If you have children or other loved ones who have special needs and who are or may in the future receive government assistance, you generally should not name that person as the beneficiary of any assets. This is because many government assistance programs are need-based, and if a special needs individual inherits life insurance proceeds or retirement plans, it may disqualify that individual for any further assistance. In these instances, a special needs trust may be created to hold the assets while still retaining the individual’s rights to government assistance. Your Houston estate planning attorney can help you determine if this is the best course of action for you to take.
- Familiarize yourself with the other aspects of estate planning. Your beneficiary designations are just one facet of your Houston estate plan, which usually should also consist of a Will, financial power of attorney, and medical power of attorney, at a minimum. Your beneficiary designations should be coordinated with the disposition of your other assets. Remember, estate planning is not only for the wealthy, and naming beneficiaries for your life insurance and retirement assets is a crucial part of passing on your legacy to your loved ones.
For more information, see this prior blog post regarding the importance of updating your beneficiary designations.
Reference: Morningstar (October 10, 2014) “How to Handle Beneficiary Designations“
