Estate Planning

Estate Planning is the process by which an individual or family prepares the transfer of assets in anticipation of death.  A properly prepared estate plan tries to preserve the maximum amount of wealth possible for its intended beneficiaries while providing flexibility for the individual prior to death.

There are many legal documents and tools available to you to ensure your assets are distributed according to your wishes.  Wills, Trusts, and Durable Power of Attorney’s are a few of these tools that can help make the transition of your estate a smooth process for your loved ones.  It is important to make sure these documents are kept up-to-date and stored in a secure location to reduce any potential complications that may arise during the transfer of your estate.

Naming Beneficiaries of Insurance Policies and Retirement Plans 

Whether you’re wealthy or earn a modest income, there is one estate planning concern that is shared by people from all walks of life—the decision of who gets what when you’re gone. While some individuals logically assume that a will is the only official forum to express such decisions, that’s not always the case. Often, an equally important issue in estate planning is the beneficiary designations listed on life insurance policies, employer-sponsored retirement plan accounts and IRAs.

Life Insurance 

Generally speaking, a beneficiary of a life insurance policy receives the death benefit proceeds income tax free. Unlike property disposed of in a will, if the beneficiary designation form is properly completed, insurance proceeds do not go through probate.

For many married individuals, a spouse will be the most logical beneficiary. However, a trust may be a prudent beneficiary choice if a surviving spouse would not have the ability to prudently manage a large sum of money. The trustees (often a legal entity rather than an individual) would then take charge of managing, investing and disbursing the policy proceeds for the benefit of the surviving spouse.

Be sure to name contingent or secondary beneficiaries. This means that if the primary beneficiary has died, the insurance proceeds will go to an individual or trust. If there are no surviving beneficiaries, then your beneficiary is generally the “estate of the insured,” which means the death benefits end up being probated and ultimately distributed according to the instructions of the decedent’s last will and testament or trust agreement (if applicable). If an individual dies without a valid will (intestate), then the order of legal beneficiaries to whom assets are distributed is specified by that state’s law.

Employer-Sponsored Retirement Plans and IRAs 

Florida law requires that a spouse be the primary beneficiary of a 401(k) or profit sharing account unless he or she waives that right in writing. A waiver may make sense in a second marriage—if a new spouse is already financially set or if children from a first marriage are more likely to need the money.

Single people can name whomever they choose as beneficiary, and non-spouse beneficiaries are now eligible for a tax-free transfer to an Individual Retirement Account. The IRS has also issued regulations that dramatically simplify the way certain distributions affect IRA owners

Naming Children May Not Be Best 

Naming children as beneficiaries of Life Insurance or Retirement Plans may cause unforeseen problems. For example, insurance companies, pension plans and retirement accounts may not pay death benefits to minors. The benefits would likely be held until they could be made to a court-approved guardian or trustee of a children’s trust. A guardian, trust or trustee should be named beneficiary to ensure competent management of the proceeds for the children. By naming a children’s trust as a beneficiary, for example, the proceeds could be invested and managed by a competent trustee (a person or institution) you choose. A revocable living trust could also be named as a beneficiary, which keeps the proceeds out of probate.

Also keep in mind that the IRS allows non-spousal beneficiaries to annuitize retirement plan distributions over the life of the beneficiary. Check with your employer to find out if this is an option under your plan prior to naming a child as a beneficiary. A competent financial professional and tax advisor can also offer guidance as to whether this action may be appropriate for you.

Keep Your Plan Up-to-Date 

When completing an overall estate plan, it is imperative to readjust all beneficiary designations so that your estate plan accurately reflects your intentions. Remember, outdated beneficiary designations (e.g., older parents or ex-spouses) could misdirect the intended flow of an entire estate unless changed now.

Also, keep in mind that beneficiaries are paid directly as named. Thus, beneficiary designations are not governed by the wording of wills.

As is always the case with estate planning, consult with qualified professionals concerning your particular situation in order to ensure that your beneficiary designations are in tune with your goals.[1]

As part of our services at Yaegers Financial Services, we can assist you in managing your estate plan.  During each review we will help you ensure your documents are up-to-date and that all of your beneficiaries are properly recorded.  Our wealth management system will assist you in securing and backing up your estate plan documents minimizing the chances of the painful legal wrangling that can often occur when settling an estate.

[1] This article was prepared by Standard & Poor’s Financial Communications and is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor or me if you have any questions.