Bulletproofing Your Beneficiaries

By Tom Fortino Features

Assets that allow beneficiary designations provide powerful benefits that permit the owner to designate who will inherit the assets, how they can inherit the assets, avoidance of probate, and potential tax minimization, to name a few. Most individuals do not give the necessary attention to how they designate their beneficiaries. In many cases, the very professionals you rely on to provide proper advice are either not aware of how to do it or do not make it a priority. Unfortunately, in either case, the potential consequences include loss of control, loss of significant money, and the incalculable effect it can have on family harmony. Below is a list of important items to consider when determining the proper beneficiaries for you.

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1. Beneficiary Audit
The first step in any process is to evaluate where you currently stand. Regardless of what ultimately makes sense for your beneficiary designations, not knowing how they are currently set up is unacceptable. This discovery process is a great exercise to go through. It not only uncovers who the current beneficiaries are, but familiarizes you with the entire process. In almost every case that I have been involved with, the beneficiary audits create surprises for everyone.

2. No Beneficiary
You have just exposed an asset that normally avoids probate-to-probate court. If a beneficiary or beneficiaries are listed, the institution holding the assets simply requires a claim to be made accompanied with a death certificate. This becomes that much more important when a beneficiary needs funds to take care of your estate.

3. No Contingent Beneficiary
If you agree that having one beneficiary is better than no beneficiary, than it stands to reason a secondary or contingent is better than one beneficiary. If your beneficiary is a spouse or loved one, and there is a common accident, or if they predecease you and you have not updated the form, you may end up have the same problems as if you had no beneficiary.

4. Adding the Term “Per Stirpes”
Per stirpes is a Latin term not uncommon to wills and trust. It literally means, “by branch.” Unfortunately, in the all the years of working with my clients I have yet to see it on even one form. By adding the term “per stirpes” to your beneficiary form you have indicated that if one of you children predeceases you, there share is to continue through this “branch” of the family. In other words it will go to their children, your grandchildren. If it is not included the share of the child who predeceases you will go to your surviving children, not your grandchildren.

5. Not Providing Additional Detail
The typical beneficiary form provides the standard fill in the blank section for the name of the beneficiary, percentage they receive, relationship and social security number. Were you aware that you may have the option of writing “See Attached” in this section? In other words, you are not always limited to the space provided. Many institutions allow the owner to provide detail that can include “what if” options, ages for distributions, limits on what the beneficiary can take, etc. You can be more creative than you think.

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6. Naming a Minor as a Beneficiary
It is with good intention that we name our children beneficiaries to our accounts. However, a minor cannot control funds. Court-appointed guardians are in control. This will result in a trip to the probate court, and later, when the child turns age of majority and gets control of the funds, a trip to the nearest sports car dealership.

7. Naming Your Spouse as Beneficiary
While not naming your spouse sounds counterintuitive, there are valid reasons not to. Keep in mind, your spouse is the only person that has the ability as a beneficiary to assume ownership of the retirement account. If they remarry or if mistakes are made, children can be disinherited. If estate taxes are an issue, you may not want to transfer ownership to a spouse, as this removes this asset from your allowable estate tax exemption to children.

8. Not Considering Creditor Protection
Would you like to protect your child’s inheritance from divorce, lawsuits, creditors, business failure, even bankruptcy? If your IRA is left to your child who later gets divorced, who will end up with the funds? A recent court decision forced a beneficiary to hand over a $300,000 to a creditor of his. While IRAs are typically protected from lawsuit during lifetime, they are not always the same protection for your beneficiaries. Would you like to protect assets and keep them in the family? Designed properly, trusts can provide protection. This is another step you may want to consider.

9. Not Using Your Revocable Trust
For those that have established living trusts, it may make sense to name the trust as the beneficiary to your retirement accounts. As we have already mentioned, if the trust is not listed as a beneficiary on your life insurance or retirement accounts, it will have nothing to do with the distribution of these assets. By using your trust, you have created a consistent distribution between retirement and non-retirement accounts, control of assets to minors, and potential creditor protection. .

One More Thing
Something else to keep in mind is taking advantage of “Stretch-Out Provisions.” While not entirely a beneficiary designation issue, it is a major tax issue. Usually, the last thing you want beneficiaries to do is to take a lump sum distribution. This usually results in a large tax bill and is irreversible. Consider leaving instructions for beneficiaries explaining that they have the option of taking distributions over their lifetime instead of all at once.

Bottom Line
When considering how to structure your beneficiaries it is not always a matter of right or wrong, it is about what you ultimately want to have happen. For example, naming a spouse or a trust may make sense for you, but not for someone else. That said, the differences between effective planning and getting it wrong can cost your family hundreds of thousands, even millions of dollars. Rules regarding retirement plans can be complicated and should never be overlooked. The best advice is to seek competent counsel and follow through with the due diligence you and your beneficiaries deserve.

Tom Fortino has been serving Illinois seniors and retirees since 1994 in planning successful estates and securing their retirement savings. To learn more, contact Tom at Alpha Wealth Group at (630) 873.6326 or email him at tfortino@alphawealthgroup.com