Presented by: Community Partner Bradford & Holliman, Estate Planning, www.bradfordholliman.com
A will designates how you want your assets distributed, but the reality is that most property passes to heirs through less formal means. Joint ownership and beneficiary designations on financial accounts and real estate avoid probate and bypass the terms of your will. However, using these designations should be consistent with your overall estate plan. A will often directs that an estate be equally divided among the decedent’s children. However, joint account ownership or beneficiary designations can actually distribute the estate unequally, or even to non-family members. Think through the following concerns carefully:
- Name your spouse, usually.A surviving spouse may roll over an inherited retirement plan into their own plan, deferring withdrawal and minimum distributions until the spouse is 70 1/2. Non-spouse beneficiaries must take distributions immediately, basing distribution on their own presumably younger ages.
- But not always. The spouse isn’t a good option if:
- An incapacitated spouse can’t manage the account.
- The spouse’s taxable estate should be minimized.
- Due to a second marriage, you want the retirement funds to benefit your first family.
- Consider a trust.A trust can solve these problems – providing for management in the case of an incapacitated spouse, providing estate tax planning opportunities and permitting assets to benefit a surviving spouse while being preserved for the next generation.
- But check the trust’s key provisions for retirement assets. Key provisions are critical to ensure the spouse is treated as a “designated beneficiary” of a retirement plan. Without the key provisions, accelerated taxation may occur such as liquidating the IRA or 401K within five years of the decedent’s death, rather than stretching distributions over the beneficiary’s lifetime.
- Consider special needs planning.Don’t cause a special needs individual to lose vital public benefits by directly naming them the beneficiary of your retirement account. Instead, name a special needs trust as the beneficiary so the trustee can manage the funds for the individual. Or, use other estate assets or life insurance rather than a retirement account for the special needs individual.
- Keep copies of your beneficiary designation forms.Don’t count on your retirement plan administrator to maintain records, especially if you no longer work for that company.
- But name beneficiaries! The biggest mistake of all is not naming beneficiaries at all or not updating beneficiaries after an original beneficiary passes away.
In short, while wills are important because they name a personal representative to take charge of your estate and name guardians for minor children, beneficiary designations are just as important for an estate plan.
–Melanie Bradford Holliman
Partner, Bradford & Holliman, LLC
Practice focuses on estate planning, elder law and special needs trust.
2491 Pelham Parkway, Pelham, Ala. 35124
This article is for educational purposes and is not intended for specific legal advice.