Your best-laid plans for the distribution of your wealth at your death may go badly awry if you stumble with the titling of your assets and/or designation of beneficiaries.
For various types of assets, your beneficiary designations trump any language in your will or trust. Meanwhile, your trust is worthless if there is nothing in it. To make things even more confusing, assets that are “jointly held with right of survivorship” transfer outside your will and trust to the other joint holders of the asset.
Some of your assets are no doubt owned entirely by you – i.e. titled solely in your name. When you die, your estate planning documents – a will and any trust that you established – dictate who will receive assets held solely in your name or in the name of your trust.
Other assets may be jointly held by you and another person, typically a spouse. This ownership is typically referred to as “jointly held with right of survivorship”. Jointly held assets pass to the other joint holders, who can do what they want with the asset. Consequently, if you’re in a second marriage and have children from a first marriage, it is often best if you own an asset in your trust instead of jointly with your second spouse. Why? If you die before your second spouse does, any jointly held asset will now belong solely to your second spouse. If the second spouse desires to do so, he or she could leave this asset to his or her friends or relatives and cut your children out. Alternatively, if you title assets in the name of your trust, you can ensure that your children will ultimately own your trust assets while providing for your second spouse’s support in the meantime.
As noted earlier, another group of assets pass by beneficiary designation. Those assets include life insurance policies, retirement plan assets, Payable on Death Accounts (P.O.D. accounts), and Transfer on Death Accounts (T.O.D. accounts). (P.O.D. accounts apply to bank accounts and certificates of deposit. T.O.D. accounts apply to securities, including stocks, bonds and mutual funds.)
If a beneficiary is not named, these assets – except retirement assets -- will transfer to your estate and will be distributed according to the designations in your will. Retirement assets for which no beneficiary was named will be distributed based on what it says in the retirement plan’s “administrator’s plan document”. That may mean that your retirement assets would go to your surviving spouse, or to your estate if there is no surviving spouse and you did not name a contingent beneficiary.
Caution: A trust can be named the contingent beneficiary to your retirement plan, but don’t transfer the title (i.e. ownership) of a retirement plan to a trust. If you transfer title, the transfer will be treated as a withdrawal from your account. That means that you’ll have to pay a penalty unless you meet the age requirements for withdrawal.
Nor should you name “my estate” as the beneficiary of a retirement plan. If you do so, the full amount of the plan must be distributed within five years of your death. Had you named individuals as beneficiaries instead, they may be able to “stretch out” the distributions – and the related taxes – for many more years. The delayed distributions capture the benefits of tax-deferred growth over a longer period.
It is best not to designate “my estate” as the beneficiary of any asset – whether or not it is a retirement plan account. Why? The words “my estate” will trigger a need for probate, which might have been avoided otherwise.
Don’t forget to change your beneficiaries when your life or your goals change. Life changes include marriage, divorce, and births and deaths of your intended beneficiaries or potential beneficiaries. Your ex-spouse is automatically written out of your will when your divorce is finalized, but your ex-spouse could inherit certain other assets, such as life insurance proceeds, if you fail to remove the ex-spouse’s name as the beneficiary.
Also be certain that the life insurance company or retirement plan administrator correctly records the names of your intended beneficiaries. Get a copy of their records for verification purposes. Check also whether the beneficiary form enables the children of a child of yours (i.e. your grandchildren) to inherit if a child predeceases you. Otherwise, your surviving children may get all of the money and cut out your grandchildren from a deceased child.
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