The Importance of Beneficiary Designations

EP - Aug 21It’s easy to think of an estate plan as simply a will, a trust, or some power of attorney documents. While these are an imperative part of any estate plan, the work is not complete once the documents have been signed. The individual will want to be sure that they have brought their beneficiary designations for certain assets (namely life insurance policies and retirement accounts ) in line with the overall scheme of their estate plan.

Life Insurance

Life insurance can often be a large part of an individual’s estate plan. They might intend to use the life insurance policy as a way to make a large gift to one or more beneficiaries, or they might intend to have their executor use the proceeds from the life insurance policy to pay estate taxes or other expenses of the insured’s estate. If a proper beneficiary designation is not put in place before the insured individual dies, the proceeds might not pass as they intended (i.e. they could pass to their estate or to a beneficiary or group of beneficiaries that the insured did not intend to benefit).

Retirement Accounts

For retirement accounts, the implications for failing to have a named beneficiary can be much more dire. Retirement accounts, such as IRAs and 401(k)s, might be an individual’s single biggest asset, and that individual will want to be sure that the proceeds from those accounts end up with the right beneficiaries, and that the beneficiaries receive the greatest tax benefit possible. A proper beneficiary designation allows the beneficiary to “stretch” any required minimum distributions over the life of the beneficiary (as opposed to the life expectancy of the deceased individual).

Ideally, the account owner would designate his or her spouse as the beneficiary. The spouse is then able to roll the retirement account into their own retirement account and stretch the distributions according to their life expectancy. Even if an account owner is not married, it is still preferable to designate a non-spouse beneficiary as opposed to not naming a beneficiary at all.

In the case of a non-spouse beneficiary, if the original account owner dies before age 70 ½, the required minimum distributions will be based on an IRS table that takes into account the beneficiary’s life expectancy. If, on the other hand, the original account owner dies after age 70 ½, the required minimum distributions are based on an IRS table that takes into account the longer of the beneficiary’s life expectancy or the account owner’s life expectancy. If an account owner dies before age 70 ½ and fails to name a beneficiary, then the beneficiaries are determined by the account agreement. Such beneficiaries will be required to withdraw all of the account within five years of the original account owner’s death. Moreover, the required minimum distributions will be based on the account owner’s life expectancy (which is likely to be shorter, perhaps significantly so, than that of the beneficiary).

The distributions that the beneficiaries eventually receive are income taxable to the beneficiaries. Unfortunately, this cannot be changed , but by having beneficiary designations in place, the income tax burden can at least be mitigated to some extent.

Final Thoughts

First, it isn’t enough to just name a primary beneficiary. An account or policy owner should be sure to name contingent beneficiaries as well in the event the primary beneficiary is unable or declines to accept the benefits. Second, beneficiary designations do not have any bearing on the inclusion of the value of the account or policy in the owner’s gross estate for estate tax purposes; in fact, the value of life insurance policies and retirement accounts are typically included in the owner’s gross estate. The designating of beneficiaries is more of an income tax play as opposed to an estate and gift tax play. Finally, it is important for an account or policy owner to understand that their estate planning attorney can assist with finding the necessary institutions to get the proper designations in place. and help you with the forms that the institutions are likely to provide.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.

Estate Planning Documents for Your High School Graduate

EP - AugThis is an exciting time for many young adults. High school is now over and the dream of moving out of mom and dad’s house and going to college is quickly becoming a reality.

Before they spread their wings and leave the nest, however, you should make sure that your newly minted high school graduate is equipped with a few essential estate planning documents.

Statutory Durable Power of Attorney: Ideally, this document would appoint the student’s parents as the student’s agents (either as co-agents or in succession) for purposes of acting on the student’s behalf for certain financial and/or legal matters. This will allow the student’s parents to take care of any bills or other financial obligations of the student in the event they become incapacitated. One thing to be aware of is that the Statutory Durable Power of Attorney can be made effective either immediately or only upon the student’s subsequent disability. It is important to understand that if the power of attorney is made effective only upon the student’s subsequent disability then the parents will not be able to utilize any powers under the durable power of attorney until a physician has certified in writing that the student is incapacitated and unable to manage their own financial affairs.

Medical Power of Attorney: The purpose of this document is to ensure that the student’s parents are able to make a medical decision for their child in the event the child is incapacitated or otherwise unable to make a medical decision on their own. It is important to understand that the agents power under the medical power of attorney only becomes effective in the event of the student’s incapacity (i.e. the law is clear that if an adult is mentally competent to make a medical decision then no agent named under a medical power of attorney can usurp the competent adult’s ability to make their own medical decision).

HIPAA Authorization: This document works hand-in-hand with the Medical Power of Attorney discussed above. With the complicated HIPAA laws in place doctors are limited in to whom they can release a patient’s sensitive medical information to. That being the case, this document ensures that the doctors are able to discuss the necessary medical information with a patient’s agent under a medical power of attorney document. This, in turn, ensures that the agent is able to make the best and most informed medical decision possible.

With these three documents in place, your student can be sure that someone will always be ready, willing and (perhaps most importantly) able to act on their behalf in the unlikely event they become unable to do so themselves. These documents are easy and inexpensive to prepare, and you should be sure to discuss them with your college-bound student and your estate planning attorney before your student heads off to give it that old college try.

John Conner is the author of this post. He can be contacted at jconner@gdhm.com or 512.480.5612.