The Importance of Beneficiary Designations to Your Estate Plan
Apr 18, 2017
Generally the named beneficiary of life insurance contracts, IRAs, pension plans, and tax-deferred annuities will receive the assets at the death of the insured. When the beneficiary has attained the age of majority and is a natural person, not an estate, the beneficiary will receive the assets without any probate action. Problems generally arise when there is no beneficiary designation or if the beneficiary designation is outdated or improper.
Here are some general guidelines to designating beneficiaries:
- Names, birthdates, and relationship to the insured/owner should be stated. Simply stating “spouse” or “children” is not sufficient.
- Don’t name a minor as a beneficiary without also having a custodian named in a will or trustee in a trust who is willing and able to act in the minor’s best interest. Death proceeds left to a minor will not be made available on the minor’s behalf. The courts will appoint a conservator or wait until the minor attains age 18 or 21, depending on the state.
- If there is more than one beneficiary, be sure to use a percentage of distribution to go to each beneficiary (never use amounts). There are several reasons for this – if there is loan outstanding the amounts may need to be allocated or if a child predeceases you and you want the deceased child’s heirs to receive the deceased’s benefits, then percentages make sense.
- Avoid naming a revocable trust as the primary beneficiary to an IRA or tax-deferred annuity when the spouse is still living. When a spouse is named as the sole primary beneficiary, the spouse can inherit the IRA or tax-deferred annuity and treat it as if it were their own. If there are two or more primary beneficiaries named, the spousal continuation option is lost. When there is a second marriage, incapacitated spouse, special needs dependent, or minor children, then the spousal continuation option may not fulfill the deceased’s wishes. If a trust is to be the primary beneficiary, then an attorney should advise you on how the beneficiary designation should be structured.
- In community property states (AZ, CA, ID, LA, NM, NV, TX, WA, and WI) the spouse will always have a one-half interest in the contract (unless the spouse waives their right to benefits). Naming a beneficiary, other than the spouse, will not defeat the half community interest.
- Use the term “per stirpes” if you want to divide benefits among living members of a class and the descendants of deceased members. If beneficiaries A, B, C, and D are named and C pre-deceases the insured/owner (and no new beneficiary designation is made) C’s children will share C’s beneficial interest.
- Use the term “per capita” if you want proceeds only shared by survivors. If beneficiaries A, B, C, and D are named and C pre-deceases the insured/owner (and no new beneficiary designations are made) the benefit will be divided between A, B, and D.
Beneficiary designations should never be considered a substitute for a will; however, beneficiary designations do SUPERSEDE a will.
Beneficiary designations should never be considered a substitute for a will; however, beneficiary designations do SUPERSEDE a will. Courts have generally favored the beneficiary designation in a life insurance contract, IRA, pension plan, or tax-deferred annuity over a will. There have been many court cases decided in favor of an ex-spouse because a new beneficiary designation was NOT presented to the insurance company/IRA custodian, even though the deceased’s will states that the life insurance proceeds, IRA, and tax-deferred annuity become the property of the beneficiaries designated in the will.
Be certain that your last wishes are fulfilled. Review your beneficiary designations with your Western Fraternal Life agent.
Disclaimer: The contents of this article are believed to be accurate, but are subject to interpretation. We do not offer tax or legal advice. Please consult your own tax and legal authorities.
CFP®, FLMI, Annuity Product Manager
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