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When someone dies, and their heirs begin the process of settling the estate, it is not uncommon to be surprised to learn who is the beneficiary of the IRA or 401(k) is.
We have seen cases where the ex-spouse or sibling is the beneficiary rather than the spouse. This happens when the decedent fails to keep the beneficiary designations up to date and never changed the designation after divorcing and re-marrying.
In some families, the above scenario may not create a problem, and the beneficiary will simply turn the check over to the new spouse. Unfortunately, there are situations where that may not happen. This can create havoc in a family during an already emotional time.
Another common mistake is making a bequest to a minor child without understanding what that means. Minor children cannot inherit assets outright.
One option is to leave assets to a minor child through an account called a Uniform Transfers to Minors Act (UTMA). A UTMA gives the owner control over selecting the custodian should the owner pass away before the child reaches the age of majority. This avoids the process of having a custodian appointed by the court.
Another option is to name a trust as a beneficiary. This option allows the most control of how the funds are managed and distributed. A trust allows distributions to be stretched out over the beneficiary's lifetime. Separate trusts can also be set up for multiple children in order to equitably distribute assets from an estate.
It is common to leave financial assets to a loved one with special needs. In these cases, it is important to make sure they are left financially secure, but it is not always the best idea to designate them as a beneficiary. If a loved one with special needs inherits financial assets directly from you, they could lose certain government-provided benefits. In addition, the person with special needs may not have the intellectual capacity to manage the assets.
We recommend creating a special needs trust, including assigning a trustee or custodian to manage the assets for your loved one. Too often someone with good intentions leaves their financial assets to someone with special needs, hoping to protect them long-term, only to have those assets depleted quickly due to poor management and oversight.
1. Make it a practice to revisit your beneficiary designations regularly, especially when key "life moments" happen, such as a marriage, divorce, birth, or death.
2. Consult with your attorney or tax advisor about who best to designate as your beneficiaries, and keep in mind that spouses who inherit certain assets get special treatment in the tax code. It can be very advantageous in tax planning for a spouse to inherit certain assets (such as rollovers of IRA and HSA accounts into their own accounts), ahead of other individuals who will not receive the same tax advantages. This is also true for same-sex married couples.
3. Make sure your beneficiary designations match your estate planning documents. It is a common mistake to make beneficiary designations and then later draft a will or trust document while thinking these will supersede all other designations. In most cases, the former may contradict the latter, and the beneficiary designations will trump what is included in the other documents, regardless of when the documents were prepared. This is the case with death benefits from a life insurance policy as well.
Follow these simple steps to make sure your heartfelt choices are carried out with the best and intended results possible. So, if you did not give your beneficiary designations much thought when you first made them, or it has been years ago and a lot has changed in your life since then, now is the time to revisit them.
Delap is one of Oregon’s largest local tax, assurance, wealth advisory, and cybersecurity consulting firms, located in Lake Oswego, Oregon. Please reach out today at (503) 697-4118 to see how we can help with your beneficiary designations.