Samuels: Will your assets go to the loved ones of your choice?
By Laurie Samuels Guest Commentary October 28, 2012 4:26PM
Updated: October 29, 2012 8:51AM
You’ve worked long and hard to accumulate a company retirement plan, insurance policies, annuities and other assets. Most people desire that their family members and charities inherit their assets after they are gone. Designating beneficiaries may seem simple, but bear in mind the following points when making your decisions:
1. Basics of designating beneficiaries
Most retirement plans, life insurance policies, and annuities allow you to designate a beneficiary. You can name almost anyone or anything as your beneficiary — including family, friends, charities, institutions and trusts.
The primary beneficiary or beneficiaries inherit first. If the primary beneficiary predeceases you or dies with you, your assets will then pass to any secondary beneficiary that you have named. It is important that you clearly state the name of the beneficiary. You should also state what percentage of each asset goes to each beneficiary.
When you name a beneficiary, those assets can pass directly to whomever you designate. So this means that these assets will not have to go through the probate process. For example, if your will states, “I leave everything that I own to Uncle Vinny,” but the beneficiary designation of your retirement plan is the “Cancer Society” as 100 percent beneficiary, then the Cancer Society will get 100 percent of the retirement plan assets. With that being said, ensure that your beneficiary designations reflects your most recent desires because your will cannot override them.
2. Considerations in designating beneficiaries
Be aware that inheriting assets may create tax ramifications for your loved ones. Spouses can generally inherit assets from one another without generating estate taxes or, in the case of qualified retirement accounts, be forced to take mandatory taxable payouts — unless the inheriting spouse has turned age 701/2. Similarly, if you name a charity or a nonprofit group as your beneficiary, not only will the entity receive the assets tax-free, but your estate also will be eligible for a charitable deduction.
For nonspouse beneficiary designations, the amount you leave will be included in the value of your estate, and consequently could increase your estate tax liability. In addition, if your nonspouse beneficiary already has a large amount of assets, you could create or compound a federal estate tax liability for him or her. Per the Internal Revenue Service, for the calendar year 2012, the basic exclusion from estate tax is $5,120,000. Assets above this amount are subject to federal estate tax.
3. Give special consideration to children and those with special needs
Underage children cannot directly inherit certain assets, such as annuities, retirement plans or life insurance policies. You may need to consult with an attorney to set up a trust for them and then name the trust as your beneficiary. You also may consider creating special needs trusts for beneficiaries with mental or physical disabilities if they are unable to handle their own affairs. Do note that transferring assets directly to a person with special needs could affect their eligibility for government assistance.
4. Regularly review your beneficiary designations
Annual review of your beneficiary designations is suggested, but at a minimum one should review at major life-changing events. Events such as marriage, divorce, birth of a child or death of a loved one may require you to update your beneficiary designations. If your employer changes retirement plans, this also would be a good time to make sure that your new plan clearly states your named beneficiaries.
Laurie Samuels is a retirement and estate planning attorney in Illinois. For information, contact Abednego Wealth Management at (888) 633-6119.