Did You Remember to Designate a Beneficiary?

Although you may have already set up an estate plan that includes a living trust and/or will, there are still some assets that are distributed upon your death by designated beneficiary.  Typically, these assets include your retirement accounts (IRAs or 401Ks), annuities, and life insurance policies.

When reviewing current beneficiary designation or if you are completing these forms for the first time, you need to consider not only who the primary beneficiary is, but also what happens if that primary beneficiary predeceases you. Specifically, does the form indicate that the deceased beneficiary’s interest goes to someone else you explicitly designated, does it go to the other surviving beneficiary, or did you check the box that says it goes to that deceased beneficiary’s children?

Additionally, do you understand what happens to the asset if none of your named beneficiaries are living? Often this can mean that the asset goes to your estate and may potentially be subject to probate proceedings.  To address this worst-case scenario, you might consider naming a charity, or for individuals with a living trust, it may make sense to make your trust the beneficiary.

Naming your trust as a beneficiary may make sense especially if your trust estate will need more liquidity (e.g., only your personal residence is held in your trust, and your trustee may need money for its expenses after your death), you have minor beneficiaries, or you have beneficiaries with special needs.  You should ultimately discuss this decision with your estate planning attorney and your tax advisor, however, since there could be unintended tax consequences if you name your living trust as a designated beneficiary.

Tax consequences can have a huge impact on your beneficiary decisions, and you should consult a tax professional when you are designating beneficiaries on retirement accounts regardless of whether your intended beneficiary is an individual or a trust.  For example, with Inherited IRA accounts, generally beneficiaries must make an election to take distributions over the course of their lifetime or within five years after the death of the account holder. If it is a Traditional IRA account, these distributions are taxable, but with an Inherited Roth IRA, beneficiaries do not pay taxes on distributions. Knowing this you can be more strategic about your beneficiary elections (e.g, if you know certain beneficiaries are in lower income brackets, it can make more sense to leave your Traditional IRA to them and the Roth IRA to beneficiaries in higher income brackets).

You should review all accounts (especially retirement accounts, annuities, and life insurance policies) on a regular basis to ensure that your beneficiary designations are current and reflect your wishes.  Please call our office at (408) 402-4064 to schedule your complimentary consultation to discuss beneficiary designations and how they fit into your overall estate plan.

All materials have been prepared for general information purposes only to permit you to learn more about our firm, our services, and the experience of our attorneys. The information presented is not legal advice, is not to be acted on as such, and may be subject to change without notice.