Buechner Haffer Meyers & Koenig Co., LPA
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Assets with beneficiary designations by Andrea Costa Laden

Effective estate planning requires revision and adjustment as a person's life, job, and investment portfolio change over time. Periodic monitoring is particularly important for assets with beneficiary designations. These assets, such as life insurance policies, bank accounts, IRAs, employer-sponsored retirement plans, and annuity contracts, can be designed to automatically pass to a beneficiary you specify upon your death pursuant to a "Transfer on Death" or "Payable on Death" designation.

Assets with beneficiary designations are part of your taxable estate, but may not pass through a Will or trust unless the beneficiary designated is your estate or a particular trust. This makes it very important to periodically review all beneficiary designations for your assets to ensure that they continue to align with your intentions and estate plan.

Common Pitfalls when Designating Beneficiaries

There are a number of common pitfalls that can arise when making beneficiary designations without consulting an experienced estate planning professional.

  • It is essential to name a contingent (secondary) beneficiary if your primary beneficiary is an individual. Otherwise, if the primary designated beneficiary predeceases you, the asset must go through probate, and in most cases, this is a disadvantage.
  • If you name a minor as a beneficiary, then a number of problems will arise. A court will likely establish a guardianship for the minor and oversee the use of these funds. This can be costly and time-consuming.
  • If an adult individual beneficiary is disabled or incapacitated at the time you die, the court will also likely take control of the funds by way of a guardianship.
  • If, at the time of your death, your individual beneficiary is experiencing money problems, such as overspending, substance abuse, bankruptcy, or divorce, your bequest to that person may be squandered.
  • If an individual beneficiary receives government assistance, such as a child or parent requiring specialized care, designating that person as an individual beneficiary may jeopardize his or her qualification for such assistance.

Many of the pitfalls listed above can be avoided through careful planning and the establishment of a trust. In particular, if a trust established to benefit particular individuals is designated as the beneficiary of an account allowing such a designation, a "good citizen" clause restricting the trustee's ability to make distributions to a beneficiary if he or she is experiencing a divorce, bankruptcy, period of substance abuse, or other creditor problem can be helpful. Moreover, a trust established for the care and education of minor children and delaying distribution of the trust assets until the age of 25 or 30 can both avoid the establishment of a guardianship and provide more structure to encourage the responsible use of the bequest until the child reaches a mature age.

Designating a Beneficiary for Retirement Assets

It is also particularly important to carefully designate beneficiaries for retirement assets. Otherwise, tax deferral opportunities could be lost. Depending on your goals and the other assets available, common beneficiaries designated on such accounts are spouses, children, grandchildren, trusts, charities, or a combination of these types of beneficiaries.

Retirement assets, unless left to a tax-exempt charity, are subject to income taxes at some point. For this reason, if you are charitably-inclined, it may make sense to use retirement assets rather than other assets for any charitable giving by designating the charity or charities of your choice as beneficiaries.

Proper planning can also lead to income tax savings if an individual is designated as the beneficiary of an IRA or other qualified retirement benefit, such as a 401(k) or

403(b) account. The objective in this instance is often to maximize the tax deferral in order to allow the assets to grow tax free for as long as possible before being distributed. Upon distribution to a beneficiary, income tax will be assessed. Naming a spouse as a beneficiary allows the spouse to rollover the IRA or other retirement benefit and continue to defer distribution (and income tax) until he or she reaches 70 ½, when the law will require him or her to begin taking minimum payments.

Sometimes a longer deferral and growth period can be achieved by naming a non-spouse, such as a child or grandchild, as the designated beneficiary of a retirement account. This individual could then establish an inherited IRA in the name of the deceased grantor. The distributions could be spread out over that individual's life expectancy, which may be a lengthy period of time in the case of children or grandchildren.

There are a number of other important factors to consider when designating beneficiaries for assets such as insurance policies, bank accounts, retirement accounts and annuity contracts. This article is intended to provide a broad, general overview of several of the more common topics of concern when dealing with assets transferred at death by beneficiary designations. The rules in this area are complex. It is highly recommended that you seek the assistance of competent counsel to advise on these and other estate planning matters.

Buechner Haffer Meyers & Koenig Co., L.P.A. is a full service law firm with a number of attorneys who are experienced with estate planning issues such as those outlined above. Should you have questions or interest in discussing your estate planning needs, please contact one of our experienced estate planning attorneys to determine the plan that will best fit your needs.

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