BoomerGirl Diary

If you are a motivated, organized person, you undoubtedly have met with your attorney in the past five years and prepared/updated your will, power of attorney and living will/health care power of attorney. But did you prepare your beneficiary designations to be consistent with your estate plan?

Because so many assets are held in retirement accounts, annuities, life insurance policies and other products that require you to designate a beneficiary when you enroll in the plan or purchase the asset, the completion of these forms as a part of the estate planning process is critical.

Here is an example of a completed plan that is made ineffective because the beneficiary designations were not consistent with the estate plan.

A husband and wife have wills prepared that call for or allow for the funding of a trust at the time of the first death. Typically, the primary motivation for funding the trust will be to eliminate or minimize death taxes (federal estate tax and state estate/inheritance tax). The assets held by the couple include a home held as joint tenants (all interest goes to the survivor), retirement accounts and miscellaneous smaller assets. The beneficiary designated for the retirement account is the surviving spouse. The husband passes away and the wife is advised to fund the trust. Because all assets have passed to the wife outside the terms of the will — as surviving joint tenant or as named beneficiary — there are not assets available to fund the trust and the planning objectives were not met.

Though this scenario does not apply to single persons, the issue remains key in their planning process as well. For example, if you are a person with charitable intent, your retirement assets are the first asset you should consider to make these gifts. Qualified charities will not be subject to income tax on distribution from a tax-deferred retirement account; individual beneficiaries will pay income tax when these funds are distributed to them. With proper planning, distribution to individuals from qualified retirement accounts can continue for years after the participant's death. Without proper planning, full distribution can be required in no more than five years.

The advisable choice of beneficiary for retirement accounts may differ from the choice for your life insurance. There are many specific rules governing distribution of your retirement assets. These rules have been liberalized significantly over the years, but because these assets will be subject to income tax when distributed, special attention needs to be given to these beneficiary designations. Life insurance provides a very flexible pool of cash not subject to income tax when proceeds are paid to the beneficiary.

For an estate plan to be a complete estate plan, completion of forms to properly designate beneficiaries must be included in the planning process. The beneficiary you name will effect how much income tax is paid on retirement assets and may affect your survivors’ ability to implement your plan as you intended.