Keep your estate plan on track with a beneficiary review

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 12/17/19


When people gather for annual celebrations, they often comment on how fast the year has gone.

Not only does time fly, but it can also bring life changes such as marriages and births.

While individuals may not be focused on financial documents, it is important to capture beneficiary changes due to life changes. Year-end is an opportune time to offer a beneficiary review to ensure that accounts are up-to-date.

Why a beneficiary review is critical

  • It’s important for investors to update their beneficiaries to keep estate planning goals on track.
  • Life situations, such as divorce, can lead to complications later if documents are not updated. For example, a forgotten account may be inherited by an ex-spouse.
  • If no beneficiaries are designated, an estate must generally go through the probate process. Most individuals try to avoid probate because it is a costly and public process and lengthens the time it takes to settle an estate. Documents can be prepared to avoid probate, but beneficiaries need to be named.
Investors need to be mindful that some IRA agreements or plan documents may identify "default beneficiaries" in cases where there is no named beneficiary.

Potential tax-saving opportunities may be missed if documents are not up to date.

Planning considerations

  • Consider tax efficiency. It may prudent to leave (taxable) IRA assets to heirs who will likely be in lower or moderate income tax brackets, while leaving other assets to heirs in higher tax brackets. Heirs can benefit from step-up in cost basis at death on non-retirement assets such as stocks or real estate. It may be more tax-efficient to leave these assets to higher-income heirs.
  • Naming a minor as a beneficiary. Make sure guardianship plans are in place. Another option is to use a trust that can control account distributions to heirs.
  • Review all non-retirement accounts. These include brokerage accounts, bank accounts, or mutual funds held outside of a retirement account. Investors can use a “payable on death” or “transfer on death” account to pass assets directly to an heir outside of the probate process. Use of these accounts does not require that the heir be added as a joint owner while the primary owner is still living.
  • Leaving assets to children. Investors should be specific about leaving assets to children. If they leave assets “per stirpes,” it means that the beneficiary’s assets will go to his or her heir. If the assets are left “per capita” it means that the assets can only be distributed to the named beneficiary.
Seek expert advice for advanced strategies

It is important to consult a financial advisor to understand how estate tax and gift tax rules may affect your personal financial plan. Individuals considering advanced planning strategies around estates, such as the stretch IRA strategy or creating a trust, should work with a qualified estate planning attorney who has knowledge of their financial situation and goals.

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