Simply defined, a beneficiary is someone who receives benefit. However, when considering your succession & estate plans beneficiary designations can get complicated. Too often beneficiary designations are set up, forgotten, and never maintained. Advisors, Institutions and account owners are all guilty of this neglect. The problem is, life evolves and we need beneficiary designations to keep up.
Avoid common beneficiary designation mistakes by taking a few proactive steps. Review your beneficiary designations every few years. Any time there is a significant life event such as a birth, death, divorce, or a marriage, update your beneficiary designations. If you have recently updated, changed, or added a codicil to your will, update your beneficiary designations.
Many account types have a beneficiary designation or some type of succession in place. Some of these account and beneficiary types work with your existing wills and estate plans and some are completely separate. Below are a few of the more common beneficiary designations and account types:
Joint with Rights of Survivorship: Technically this is not a beneficiary designation, but an ownership designation, but felt this was important to include. Each person named on the account has control over the account. The key thing to remember on a Joint with Rights of Survivorship, is when one owner dies, the account ownership automatically goes to the surviving owner. This account does not flow through the will of the decedent. If a will has trust provisions, gifts to charity, or multiple heirs nothing in a Joint with Rights of Survivorship account will go to those named in the will. This account type is commonly used for married couples when they want or need the account to go directly to the surviving spouse.
Joint Tenants in Common: Again, this is not a beneficiary designation, but an ownership designation. Each tenant has control of the account. However, each tenant owns a percentage of the account. Most commonly we see two tenants, each owning 50% of the account. When the first tenant passes away their proportionate ownership is then passed to their heirs as their will and estate plan dictates. The remaining tenant then receives their proportionate ownership directly. This type account is most commonly used when there is a trust established in the will of a married couple, or a second marriage with kids from the previous marriage.
IRA’s Roth & Traditional: IRA’s will not flow through your will. Instead go directly to the named beneficiaries, unless you specify your estate as the beneficiary. Most institutions allow for a Primary and Secondary or Contingent Beneficiary designation on an IRA. Many IRA agreements also have provisions on how the account would be distributed if no beneficiary designation is made. Typically, this default designation is spouse, then surviving children, and then your estate. When selecting beneficiaries, you can make the designation “per stirpes” or “per capita”. Per stirpes (by class) the distribution will flow along the family line. Each child will receive their designated share. If a child predeceases you then their share will be distributed amongst their children or to their estate. A Per Capita (by head) designation results in the shares being redistributed amongst the surviving children. So, if grandchildren are to receive anything they must be named as a primary beneficiary too. Per Capita can also trigger generation skipping tax in some situations. It is important to consult with your legal and tax advisors before making these decisions.
Life Insurance: Death benefits from a life insurance policy do not go through your will, but instead go directly to the named beneficiaries like an IRA, unless you specify your estate as the beneficiary. Also, many life insurance policies include both Primary and Secondary Beneficiaries. Life insurance policies have several moving parts that can affect how the policy is paid and how the distribution is included in an estate. These parts include how and who funds the policy, who or what entity owns the policy, and who or what entities are the beneficiaries. Many times, insurance policies are purchased and never looked at again. Life insurance policies should be reviewed every few years. During that review policy performance, beneficiary designations, insurance need, and ownership should all be reviewed.
Transfer On Death (TOD): The account owner of a TOD account will name one or more beneficiaries and the percentage of the account they will receive at the owner’s death. Again, this type of designation does not go through a will. This designation is not compatible with a will that establishes a trust or specifies other individuals as beneficiaries. However, it is a very effective & quick way to transfer assets to one or more individuals at death.
Hopefully this will give you a better understanding of the different type of accounts and how to make and maintain your beneficiary designations. Always talk with your tax and legal advisors to fully understand the implications that beneficiary changes will have on your taxes and estate plan. Raymond James, its advisors and the advisors at Laguna Wealth Services do not give tax and legal advice.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Matthew Apple and not necessarily those of Raymond James.
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