The Importance of Updating Beneficiary Designations
Question: What does $17 trillion represent?
Answer: The amount of money held in tax-deferred retirement account assets (i.e. IRAs, 401(k)s, etc.)
For many Americans, the bulk of their net worth is held in these retirement accounts. But many don’t understand the importance of one little form that governs the ultimate disposition of these assets—the beneficiary designation form.
There is a widespread misperception about how assets pass at death. Some assets are passed via will and are considered probate assets; but some assets are governed not by what the will dictates, but by the beneficiary designation. Some of these assets include retirement accounts and life insurance policies. Making sure beneficiary designations are complete and up to date is just as important as ensuring that you have other estate planning documents in place, such as a will, health care proxies and powers of attorney.
Here are some of the common mistakes that occur with beneficiary designation forms:
1. No beneficiary named — In the case of an IRA, not naming a beneficiary can mean that the ultimate recipient will have a shorter period of time to withdraw the funds than if a beneficiary had been named.
2. Naming the estate as beneficiary — If a beneficiary is not named or the beneficiary predeceases the IRA holder, the estate usually becomes the beneficiary. While you can name your estate as beneficiary of an IRA, it is generally not the best option. If the estate is beneficiary, the IRA becomes a probate asset and has to go through the probate process, which costs money and time. Additionally, the IRA would generally need to be paid out over a shorter period of time.
3. Lack of a contingent beneficiary — If the primary beneficiary dies before the IRA holder and no contingent beneficiary is named, the IRA will be deemed to have no beneficiary.
4. Not naming all children as beneficiaries — There have been cases where individuals have not named all their children as beneficiaries because there was not enough room on the form and because they thought that since all of the children were named in the will, it didn’t matter. Also, if you intend to leave your IRA to multiple children, make sure you define that you want it left in “equal shares.” There was a case where a mother with six children left out the words “equal shares” and as a result, the IRA custodian interpreted her intent was to leave the IRA to her first child with the other five as contingent beneficiaries.
5. Naming a minor child as a beneficiary — Since a minor lacks legal capacity, naming a minor child as beneficiary creates a set of problems. One alternative is to create a trust for the benefit of the child as beneficiary. Assuming the trust meets certain requirements, payments from the IRA could be
“stretched” over the child’s lifetime. Another alternative would be to name a custodian under the Uniform Gift to Minors Act (UGMA) for the benefit of the child. This is a less expensive option than creating a trust, but the downside is that the child will inherit the IRA outright when he/she turns 21.
6. Naming an ex-spouse — This is where things can get ugly. Even if the divorce agreement and property settlement stipulate that one spouse (the wife, let’s say) has no claim on her ex-husband’s IRA, if the beneficiary designation form isn’t updated, the ex-wife would be entitled to the IRA. There have been numerous instances where these disputes have ended up in court, and the court has unanimously upheld the validity of the beneficiary designation, regardless of what a will or divorce agreement says.
As you can see, it is important to understand the implications and importance of completing the beneficiary designation form correctly. These forms should be coordinated and consistent with your overall estate plan, and should be discussed with your advisor as well as an estate planning attorney if you have questions about the optimal designation for your unique situation. In addition, it is a worthwhile exercise to review these forms on an annual basis, or upon a change in life situation.
Loring Ward is not a legal or tax advisor. The information herein is general in nature and should not be considered legal or tax advice.
Investment advisory services provided by LWI Financial Inc. (“Loring Ward”). Securities transactions offered through its affiliate, Loring Ward Securities Inc., member FINRA/SIPC. IRN R 16-014 (1/18)
Myth 1: You have to contribute to a 529 in your home state. That statement is false with regard to 529 college-savings plans, in which money is invested in a portfolio of securities on behalf of a beneficiary. Any U.S. resident can contribute to a 529 college-savings plan in any state. Contributing to a plan offered by your home state might offer an added bonus in the form of a state income tax deduction, but that shouldn't be your sole consideration. If your state's plan is poor (with high fees and poor investment options, for example) looking at plans outside your state might be worth forgoing the tax break.
Myth 2: You have to send your child to a school in the state where his 529 plan is offered. Also false. A 529 college-savings plan is fully portable, meaning that assets can be used for college expenses in any state and at some institutions abroad regardless of which state's plan holds the account.
Myth 3: You can only get a tax deduction if you contribute to your state's plan. Usually true, but not always. In fact, residents of Arizona, Kansas, Maine, Missouri, and Pennsylvania get a state income tax break on 529 contributions made to any state's plan. Elsewhere the benefit is restricted to contributions to in-state plans, with deduction limits varying from state to state and some states offering tax credits.
Myth 4: If you save in a 529 account for your child, it will hurt his financial aid prospects. Possibly, but not as much as you might think. Yes, financial aid calculations generally do take into consideration 529 assets, but money in a 529 account owned by the parents or a dependent student counts far less than assets owned by the student outside a 529. In fact, non-529 student-owned assets carry more than 3 times more weight in financial aid calculations than do assets held in the parents' names. So no, 529 accounts aren't completely impact-free when it comes to financial aid, but the impact is relatively minor.
Myth 5: If your child doesn't go to college, you'll lose the money. Unused 529 money does not have to go to waste, or to the tax collector. It can be used to help pay another family member's college costs simply by changing beneficiaries or transferring funds to the family member's existing 529 account. And the list of potential recipients is rather long, including siblings, first cousins, parents, grandchildren, aunts and uncles, and even in-laws. If you do decide to cash out the plan, you'll have to pay federal and state income taxes on earnings, plus a 10% penalty (waived if the beneficiary dies, becomes disabled, or gets a scholarship).
Myth 6: All 529 plans are the same. This is a potentially costly mistake some investors make. Like many investment products, 529 plans may look similar from the outside, but once you get under the hood you'll find major differences that determine how effective they can be at helping you meet your college-savings goals. Fees, fund offerings, glide path (the rate at which the asset allocation switches from equities to fixed-income in age-based portfolios), and even ease of use vary from plan to plan. Fees, in particular, can have a corrosive effect on 529 assets, and can vary not only from state to state but also within the same plan.
529 plans are tax-deferred college savings vehicles. Any unqualified distribution of earnings will be subject to ordinary income tax and subject to a 10% federal penalty tax. Tax law is ever-changing and can be quite complex. It is highly recommended that you consult with a financial or tax professional with any tax-related questions or concerns. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement, and the official statement should be read carefully before investing.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017, the most sweeping change to the tax code in 31 years. What effect might the new law have on the amount you pay? Are you curious what might happen to your taxes under the new law?
Missed the Tax Cuts and Jobs Act Webinar?
No worries, if you would like to view the webinar hosted last week please click the link below for full recording.
Tax Cuts and Jobs Act Webinar
As you may know, Emily and I welcomed our first born son, Samuel into the world on June 10th at 6:53p. It was by far, the most exciting day of my life. But along with the excitement came the reminder of a whole new financial challenges and decisions for any growing family. Outlined below are four key financial considerations to help new parents prepare for many of life's unknowns.
Prepare for the Unexpected: Check your individual health insurance policy for specific guidelines on adding coverage for your newborn (most plans give parents 30 days after the birth of the child). Missing this deadline may require waiting until the next annual enrollment period to add your baby to your plan.
Life insurance is an important aspect of your financial plan and something that you may now want to consider. You may also want to consider purchasing umbrella liability insurance (particularly if hiring an in-home caretaker for the baby), to provide additional protection in case an accident occurs on your property or if you are sued. On the other hand, skip insurance that you don't need: Unless you depend on your children for financial help, insuring young children is usually unnecessary.
Kick-Start Your College Savings Plan: The most compelling college-savings vehicles offer attractive tax advantages. State-sponsored 529 plans have built-in tax incentives, and the age-based all-in-one 529 options allow you to invest money in a portfolio that gradually becomes more conservative as your child nears college age. If the baby's grandparents or favorite aunts and uncles would like to save on your child's behalf, they too can make state tax-deductible contributions into a 529 plan.
But, 529 accounts aren't for every family. They do come with some strings attached. The funds invested within a 529 plan must be used for qualified education expenses at accredited institutions. If you take unqualified distributions from a 529 account, you'll owe tax and penalty on the earnings. Before you make a decision on the best funding option for your family, give us a call.
Don't Forget Basic Estate Planning: Another key step is to designate a legal guardian for your child; a person who understands and is comfortable with the implications and responsibilities involved. You should also consider drafting a will and living will.
Many assets can be transferred to a beneficiary at death, but be aware that assigning minors as beneficiaries presents several potential pitfalls. For example, minors cannot legally own any assets. So if you want to name a child under 18 as your beneficiary, he would need a court-appointed guardian, which can be a costly process. Instead of naming your children as direct beneficiaries, consider creating a trust fund (after death a trust doesn’t go through the probate process like a will does). A special IRA trust may be best for retirement accounts.
Take Advantage of Tax Benefits: Start by applying for your child's Social Security number right away for tax purposes. All parents are eligible to claim each child under 19 as a dependent on their tax returns, which reduces taxable income by what is called the dependent exemption ($4,050 in 2017). This exemption also applies if your child is a full-time student under the age of 24. Another potential tax break for parents is the $1,000 annual child tax credit, which applies to children under 17, provided your income falls below certain thresholds. If you're paying for child care, your workplace might also provide ways for you to save on taxes. Through flexible spending accounts (FSA), parents can put away up to $2,600 each in pre-tax dollars for child care (if their child is under the age of 13) through an employer-sponsored program. Parents may also qualify for the child-care tax credit as long as both spouses are working and the child is under 13. Unfortunately, you can't double up on the FSA and the tax credit.
529 plans are tax-deferred college savings vehicles. Any unqualified distribution of earnings will be subject to ordinary income tax and subject to a 10% federal penalty tax. Tax law is ever-changing and can be quite complex. It is highly recommended that you consult with a legal, tax, or financial professional with any questions or concerns. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement, and the official statement should be read carefully before investing.