Episode 14: Beneficiary Planning

To Play This Episode On Your Preferred Podcast Source, please click the icon below:

Beneficiary Planning is a topic that is very important to us here at Rinvelt & David. We want to make sure your beneficiaries are set and accurate on all of your financial accounts so that if anything happens to you, your family won’t have to worry about going to court to carry out your desires for your accounts. 

Roger likens beneficiary planning to cleaning out your closet, saying “there's stuff in there that you haven't seen in years and weeks and months and whatever and just like, hey I just forgot all about that I had that type of thing.” 

For many, the same thing applies to beneficiary planning. You probably set it up on your retirement plan at work or maybe on a life insurance policy that you took out when you were in your 20s. But now you're in your 50s and you’ve never gone back and looked at what you listed, right? You “left it in a box at the top of your closet” and never touched it again. It can be a dangerous thing to ignore and it's almost as simple as cleaning out your closet. 

So let’s talk about why it’s so important to take a look at what you've done with the assets you’ve got to determine if everything's in the right place and is still correct. 

Start by asking yourself the following questions:

• Who am I responsible for? Who do I have to take care of or who do I want to take care of? Are there any estate planning or tax planning things to consider when laying out who your beneficiary is?
• Do you have young children? Do you want them to be your beneficiaries? Or do you have older children with disabilities? Have you established an appropriate trust to receive the benefits of your assets rather than having them receiving it outright? 

And then there’s the question you may need to ask yourself after major family holidays… what’s my relationship with my family and my friends that I designated as beneficiaries a few years ago? Or decades ago? Are they still alive? Sadly, they could have passed away. The other thing to consider is whether you’re still in good standing with your beneficiaries and you still want to leave your assets to them, or perhaps you may have changed your mind. 

Once you’ve made your choices, are there extra steps you need to do? What did your attorney say? What did your tax planning professional or CPA tell you to do? Have you done it? This refers more to your estate plan, but it is an important component of beneficiary planning. When you go to all of the trouble to get your estate plan created, you don’t want to make the biggest mistake so many do…

You have the estate plan done, your attorney lays everything out and then you forget to fund it. You don't actually do what you have to do. Also, you may forget to sign your documents. Don’t forget that either, please. 

Remember that when you're making your beneficiary designations, it's a very simple thing to do, but it can be a very costly thing if you don't do it accurately and you don't keep up on it and update it. 

This is one of the major things that we see so often when people come into our office. They are new to us, perhaps they've been with another advisor or maybe they're just doing it themselves, and when we start reviewing their account statements and supporting documentation and we find out that they haven't updated their beneficiaries in maybe 15, 20 or even more years! So much can happen in that amount of time. 

A lot of people just don't realize is that you can designate a beneficiary in a certain account. Whether it be a retirement plan, a life insurance policy, even an account at the bank, called a TOD or a transfer on death account, you can actually designate a beneficiary on each of those accounts. It’s good to be aware which accounts you have and which allow for designation of a beneficiary because that beneficiary designation supersedes anything else. 

People will tell us, “well, I just never got around to designating a beneficiary. I did everything online. I put my name in, my address, the investments in on my IRA, but I skipped the beneficiary part.”  If anything bad happens to them, that account will have to go through probate for resolution. 

But, of course, nothing bad is ever going to happen, right? That's what we all think. But we never know. It's the sad part of life. 

So you need to make sure that you're at least designating a primary beneficiary and a contingent beneficiary. That primary beneficiary, for your IRA, for example, will probably be your spouse. It can be other entities. It can be other individuals. But you have to make sure that you have a primary beneficiary. Then add a contingent beneficiary. Just in case your primary beneficiary passes away before you do. Or you two pass at the same time. The contingent will kick in and the folks handling your estate don’t have to do anything more. 

True or false? Your will supersedes all other legal documents? Actually, it really doesn't. Your beneficiary designations are the first resource to know your wishes. 

People think that a will is enough when you want to have control over how things are taken care of; how things get split up amongst people after you've passed. Well, your designated beneficiary is actually the first line of defense to avoid probate. And that's really what we're talking about here. 

We want to avoid probate so that the court is not determining who receives your money. And that goes beyond just investments and includes your home, and your other assets. This is where estate planning comes in with trust documents as well as with wills. Think of your will as the ultimate backstop. But if all you have is a will, your estate is most likely going to probate. 

Our goal is to try to address these things and avoid probate. And the best way to do it is by defining and designating these beneficiaries. If you do not, anything that is a beneficiary-driven asset, which primarily we think of IRAs, 401ks, those type of qualified retirement plans, life insurance, even your bank accounts, are subject to probate. There are different assets or non-qualified investment accounts that you can treat or retitle as a TOD or a POD (payable on death), and name beneficiaries. 

When you list a beneficiary, it avoids probate. It goes directly to whomever as a person or an entity that you've listed. If you don't have beneficiaries listed, it's going to go through probate. Your will is going to be referenced. It is a backstop and does give direction. But you're still getting into the probate process. The court has to go through everything. And it can get messy and expensive. 

So the goal of beneficiary planning is to take care of your wishes while you're still alive. While you are of sound mind and can decide who you want to receive your hard-earned financial resources. But you do have to review your choices because things do change over time. 

Probate is treated like purgatory, or just like this awful place to be. It's really not. But it is something that is totally avoidable. At least for most things that would pass to others after your death. 

When you can designate a beneficiary on an investment account, there's no reason not to do it. And there's no reason for that to have to flow through probate. That's the bottom line. 

Situations with family members change. Whether it be they're no longer in favor anymore, you don't want them to receive any of your money, or God forbid they've passed. These things happen to people. We've seen it with clients that have come to our firm. We’ve heard stories of the awkwardness and stress about someone who got divorced and didn't take their first spouse off their accounts as primary beneficiary and now the second spouse is fighting for the estate the they know their spouse wanted them to have, but didn’t declare on paper. 

Furthermore, some have forgotten to update their beneficiaries after divorce or after a family member passed, and then they pass away. Now the court is determining who receives their money. And it may not be who they assumed would receive the money. You don't want the court to have to determine that. The rules for how the courts assess that can vary from state to state. So you just don't want to mess with probate. 

You need to have a beneficiary form filled out, submitted with the appropriate details, and submitted to the company that manages your investments so that it's on file. 

You may think this isn’t a big deal or a real priority, but understand one thing, if you're in your 50s or your 60s and getting ready to retire, a lot of times your retirement account balance could be in the six or seven figures. The same can be said for big life insurance policies. Most people forget that. They think it’s general life insurance or just their retirement plan. And they don't go back and realize that it’s a lot of money. It may be just one account, but that one account might hold a lot of assets, right? 

If you know who you want to list, take it one step further and put the information in correctly! If you've got a daughter, for example, or someone who gets married and their legal name changes, go and update your beneficiaries. It is an extra step or two and it will take a few minutes, but it has to be done. Accuracy is important. 

If you're listing a trust, make sure you name your trust appropriately, that the correct social security number or tax ID is associated with it as well as the date of the trust. You need to make sure that the information is correct. You could say, oh, whoever it is will figure it out. Well, you hope, right? But you shouldn't leave this to hope. You can take the proper steps to avoid any misunderstanding after you've passed. 

One more thing - make sure that you have the documentation. Many companies will expect you to keep track of your designations. They don’t hold onto them. If something happens to you, they're going to go to your financial advisor. They're going to have your representative look at your information from your home and say, well, whatever you've got that has the latest date with a signature is what we're going use. 

Consider as well, those special circumstances that may come up. Do you have that close family member that's just not good with money? Maybe you just don't want them to have all of the money from your estate right away. Do you designate them individually as a beneficiary or maybe set up a trust where you can control the money from the grave? Do you have children or a beneficiary that has special needs? They're receiving government benefits and if they receive a lump sum amount of money because they are a beneficiary, you might put them in harm's way of being able to continue to receive their government benefits. There are certain things you can do to structure your wishes to make sure that that doesn't happen. 

Remember, if things in your life change, nobody is responsible to make sure that your beneficiary designations and trust stipulations are updated other than you. You're the one who has to initiate the update. It's not complicated. 

But we understand that life gets busy. You think, “well, I'll get around to it,” right? It’s not a big deal. It'll take me five minutes. You’ll do it tomorrow or over the weekend. And then what happens? You don't do it. 

Literally, it's a process that takes minutes. 

If you need help understanding your beneficiary planning options or what you should do, go back to the legal documents that you created. Check your estate plan, making sure that it's in line with what your attorney and CPA have told you to do. Attention to detail is very important when you're listing these beneficiaries. 

Not every situation requires a trust. More complex situations might, having younger children might, disabled children, as we mentioned. But it doesn't need to be that complicated all the time. 

We recommend at least once a year that you take a look at your beneficiaries. Just make sure that they are the way that you want them to be. And as things get more complex, if you do the legal documents, then your attorney should be giving you exact direction on what needs to be done so that you're properly titling your assets. They should supply you with funding instructions to explain how you title everything. They’ll go into detail about what a  beneficiary is and is not. So you should get that direction from your attorney as well as any follow up that you need to do. 

Those tasks are just as important as getting the estate plan established. If your accounts aren’t named properly, if beneficiaries aren’t designated properly, it may result in some very costly mistakes just from legal fees and tax fees that are going to fall on your family at your passing and they’re going to have to pay to get everything squared away. And the IRS probably will not be very understanding. 

For easy reference, in most cases, your primary beneficiary, if you're married, is going to be your spouse. You may have been told to list your trust as primary. However, that’s not necessarily the best choice if you're still married unless you have a specific reason why your spouse should not handle your assets right away. 

It can get a little bit more complex when trusts come into the mix because we've seen it before with attorneys’ recommendations where for example, on an IRA, the spouse is the primary, trust is contingent. But on the life insurance policy, the trust is listed as the primary beneficiary. And that may not be the right choice. If you’re going to go through the steps and pay a lot of money to get these documents created, you want to make sure that you implement them appropriately and that you're also asking your attorney for the explicit direction on how to list the beneficiaries in the name of the trust that you've created. And these are just a few of the mistakes that you can make. 

Some of the other mistakes maybe come after the passing of the account owner or the insured on a policy. So you may want to sit down with those beneficiaries and educate them on what the responsibility is going to be in the event that you pass away. Everybody needs to be clear on what you want to happen. 

Beyond just the beneficiary designation, you might want to provide some kind of instruction for those folks. It can be something that's tied to your estate planning documents that says what the steps are that they need to take. There could be some responsibilities or at least maybe some tax implications they’re going to need to be aware of and have a good understanding of after you’re gone. 

Beneficiary planning always comes down to good financial planning. When you're looking at your financial plan and you’re meeting with your advisor, you want to take time to review those beneficiaries. On every account. We're checking at every meeting - going back just to make sure nothing's changed and that the information is still accurate. Legal names haven't changed. Social security numbers are accurate. It's something that we wholeheartedly believe you need to stay on top of. More than once that we've actually had to change beneficiaries multiple times within a year period. 

I can't even tell you how many we've changed where we were told, “you know what, my cousin Joe… I don't like cousin Joe anymore. Cousin Joe's not going to get any money.” That’s a pretty simple change, but there are some more complicated things you can easily forget to do. So you want to make sure that when it comes to beneficiary designations, just do it. Take a look at them and make sure that your wishes are going to be followed through on, according to that beneficiary designation. 

This is all a part of bringing life and finances together. What are those relationships and how do they it relate to my finances while I'm alive, and if I'm not here any longer? Beneficiary planning. Just do it. 

Thanks so much for reading and for learning about beneficiary planning with us. For questions about our financial services or finances in general, please send us an email, give us a call, and of course, please like and subscribe to our podcast and stay tuned for our next episode.