By Mitch Adel,Senior Partner, Cooper Adel & Associates
When it comes to your long-term financial planning, among the most important and impactful decisions you will make involves selecting beneficiaries. Taking care of family and close friends when you are gone is the first priority for most of us—but, yet, we frequently treat beneficiary decisions casually and neglect to review them as often as we should.
You should name beneficiaries on all of your assets that have an account number, a deed or a title. You can name beneficiaries for each individual asset or, if it makes sense, you can fund your assets to a trust so you have only one place where your beneficiaries are named. A trust can also simplify the process of changing beneficiaries. Assigning and keeping your beneficiaries current with changes in your life is not always a simple or straightforward process. In addition, there are a number of financial and technical considerations that can have a big impact on who you decide to name as a beneficiary, particularly if you have one or more retirement accounts.
Think: Has your life changed since you first created your accounts and investments? Are you remarried or divorced? Did one of your beneficiaries marry a person with children? Chances are you need to update some of your beneficiary designations. The last thing you want is for your assets to be left to your estate (and up to the discretion of a probate court judge) or to get eaten up by significant taxes.
Here are a few simple reminders to help you make strategic and thoughtful primary and secondary beneficiary decisions:
Understand your options
While a spouse or significant other is the most common beneficiary choice, there are a number of circumstances where it might make sense to assign a different beneficiary. You do have other options, including non-spouse family members or trusts, however, alternative choices may require some additional planning.
When you select someone other than your spouse as a beneficiary, there can be additional legal and procedural considerations to take into account. Your spouse must sign off if you decide to leave your IRA to someone else, such as a child or grandchild. The problem is, unless you make special arrangements in advance, a beneficiary can cash in your IRA at your death. The result is the amount they withdraw is added to their taxable income in that year. As you might imagine, that could make for a bad tax year. On the other hand, if they keep their inherited IRA, they are building a future pension for themselves. For the “pensionless” generation (think Detroit), this can be a big benefit. Also, depending on their age or their habits, you might want to set up a special trust to protect your IRAs or other inheritance you leave them from divorce, creditors or predators. While beneficiary decisions are personal, an experienced elder law attorney teamed up with a trusted and experienced wealth management professional can help you sort through these considerations and plan your beneficiary selection accordingly.
Make a clear, conscious choice
First, think honestly and carefully about what you want. Decide who you want to benefit and how. Next, ensure that the language in each trust, insurance policy, annuity or retirement vehicle is updated regularly to reflect your current wishes. Some employer plans have default language that may undercut your decision and bypass those you want to receive the benefit of your hard work. Did you specify a contingent or secondary beneficiary if your first choice is deceased? If you fail to do so, and your plan beneficiary selection defaults to your estate it could burden your family with the delays and added cost of probate.
Don’t just “set it and forget it” when it comes to choosing your beneficiaries. Personal and financial circumstances change. Families evolve and priorities change. Needless to say, financial policies and regulations change over time. It is a good idea to make a habit of reviewing your plan annually—and most certainly when a major life event such as the birth or death of a family member or a change in marital status occurs—to ensure your beneficiary choices are right. Remember, you may have made these decisions decades ago when you first filled out your paperwork—do they still hold true?
This may seem obvious, but it is an all-too-often-overlooked mistake that has led to many instances of financial and family stress. Your wishes must be clearly stated so that your representative after your death knows exactly what is required and can easily communicate them to all involved.
Also, make sure your representatives know where you keep your important papers and account information. If they can’t find it, it is as if it did not exist. It is heartbreaking to think about all of your conscientious consideration and planning going to waste because of something as simple as a misfiled or mislaid form.
Choosing the right beneficiaries is not rocket science, but it takes focus and persistence. Bringing in an attorney who is an estate planning specialist into the mix can help to ensure that your wishes are reflected throughout the process.
Mitch Adel is senior partner at Cooper, Adel and Associates, A Legal Professional Association. With offices in Centerburg, Monroe, Sidney and Wilmington, Ohio, Cooper, Adel & Associates has clients statewide and offers regular seminars to educate seniors on critical legal and financial issues. For more information, visit http://www.CooperAndAdel.com.
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