Beneficiary Planning

Estate planning can inevitably bring up uncomfortable conversations.  While these conversations can be difficult, the actual planning itself can go relatively smooth with the help of an experienced financial planner.

In my 14 plus years I have helped both well organized, and not so well organized estates settle.  In terms of stress levels, tax liabilities, and efficiency there is a world of difference in the two. Before I get into the planning, let’s take a look at the process.

When you are married, almost everything is either joint property or the spouse will have legal rights to the property.  For simplicity purposes I am going to focus on planning for an estate when an unmarried person or a second spouse passes.

First, hopefully you have a Will.  If you do not, stop reading this and make an appointment with your local attorney immediately!

A Will is a catch all document that details how you want your estate distributed.  While your investment accounts may have named beneficiaries, the physical gold bars in your attic or the antique car sitting in your garage may not.  The Will helps to catch all of these valuable items to make sure they are distributed in accordance with your wishes.

This Will names an Executor, and this Executor is the person responsible for distributing your estate and paying the final expenses.  The probate process would commence upon your passing.

Probate is a legal process to settle your estate where the Will is first determined to be valid (or not valid) by a court, assets/debts are inventoried, and real estate is appraised.  The court can help to settle disputes, name guardians for minor children, and provide several other functions.

The Executor will open an estate account at a bank where assets are received, expenses are paid, and the remaining balance (if any) distributed to the appropriate beneficiaries.  Simple enough, right?  It can be if your Will is up to date and you have thoughtfully named your beneficiaries.

Here are some items to consider when naming your beneficiaries to make this a smooth process for both your Executor and heirs:

Life Insurance – If you name beneficiaries, the life insurance proceeds will avoid probate and go directly to them.

If you name your children and they do not have a great relationship, it could make sense to name your estate a partial beneficiary.  In doing this, a portion of the insurance proceeds could go to the estate account to help towards final expenses.  This would prevent the Executor from having to chase down money from unruly siblings, or pay it out of his/her own pocket.

Also important, life insurance proceeds that go directly to named beneficiaries could be protected from your creditors, while those going to your estate may not.  If you have a significant debt liability, this is something you may also want to consider.

Savings/Checking Accounts – Similar to the life insurance, named beneficiaries will receive the money and the accounts will avoid probate. If you have an estimate of your final expenses, it could make sense to fund a new savings account with that amount, and name your estate as the beneficiary.

Retirement Accounts – More times than not, it is a good idea to name individuals as beneficiaries to retirement accounts and not your estate. These accounts can remain in a tax qualified status and remain invested for growth.  The named beneficiaries would only need to take annual distributions in accordance with their life expectancy.  This is called the ‘Stretch’ provision and can be a great tax advantage to a beneficiary.

Company Stock – First and foremost it’s important to make sure the stock is in electronic form and you do not hold physical shares. The paperwork and process for a beneficiary to re-register physical shares of stock is daunting.  Once in electronic form, you can name beneficiaries and the stock transfer will avoid probate.

Heirs could also receive a step up in cost basis.  This means that if sold by the heir, they would only need to pay taxes on the appreciation from the date of death until sold, instead of the date the deceased originally purchased the stock.  If the stock is highly appreciated, this could be a great tax advantage to an heir.

Non-Retirement Investment Accounts – Similar to company stock, your heirs may receive a step up in cost basis on the assets within the investment account so it could be a good idea to name a beneficiary.

Real Estate – This topic alone deserves its own article as long-term care and family dynamics can come into play.

In closing, naming beneficiaries to retirement and investment accounts can provide great tax advantages to your heirs while earmarking some savings and/or life insurance proceeds to your estate can provide liquidity to help the process along smoothly.  Particularly if the estate has to sell real estate, it’s great to have those liquid assets in the estate account to pay bills while the real estate goes to market and the closing process is completed.

I hope this information is helpful, if you have any questions please do not hesitate to contact the office.