Posted On: JANUARY 2024
The chances are good that you’ve made beneficiary designations in your estate plan. Indeed, for most people, a substantial amount of wealth is transferred to their loved ones that way.
Making beneficiary designations is an excellent tool for transferring assets that aren’t subject to probate, including IRAs and certain employer-sponsored retirement accounts, life insurance policies, and some bank or brokerage accounts. Still, it’s important to occasionally revisit those decisions. Over time, these beneficiary designations may become inappropriate or obsolete because of changes in life circumstances. Making changes may be required.
Follow best practices and avoid pitfalls
As you conduct your review of your current beneficiaries, here are some points to consider:
Name a primary beneficiary and at least one contingent beneficiary. Without a contingent beneficiary for an asset, if the primary beneficiary dies before you do, the asset will end up in your general estate and may not be distributed as you intended. In addition, certain assets, including retirement accounts, offer some protection against creditors, and those protections would be lost if the assets are transferred to your estate. To ensure that you control the ultimate disposition of your wealth and protect that wealth from creditors, it’s important to name both primary and contingent beneficiaries and to avoid naming your estate as a beneficiary.
Update beneficiaries to reflect changing circumstances. Designating a beneficiary isn’t a “set it and forget it” activity. Failure to update these designations to reflect changing circumstances creates a risk that you will inadvertently leave assets to someone you didn’t intend to benefit, such as an ex-spouse.
It’s also important to update your designation if the primary beneficiary dies, especially if there’s no contingent beneficiary or if the contingent beneficiary is a minor. Suppose, for example, that you name your spouse as primary beneficiary of a life insurance policy and name your minor child as the contingent. If your spouse dies while your child is still a minor, it’s advisable to name a new primary beneficiary to avoid the complications associated with leaving assets to a minor (court-appointed guardianship, etc.).
Consider the impact on government benefits. If a loved one depends on Medicaid or other government benefits (a disabled child, for example), naming that person as primary beneficiary of a retirement account or other asset may render him or her ineligible for those benefits. A better approach may be to establish a special needs trust for your loved one and name the trust as beneficiary.
Keep an eye on tax developments. Changing tax laws can easily derail your estate plan if you fail to update your plan accordingly. For instance, the SECURE Act sounded the death knell for the “stretch” IRA. Previously, when you left an IRA to a child or other beneficiary (either outright or in a specially designed trust), distributions could be stretched out over the beneficiary’s life expectancy, maximizing tax-deferred savings. Today, most nonspousal beneficiaries of IRAs must distribute the funds within 10 years after the owner’s death.
In light of this change, review the designated beneficiaries for your IRAs and other retirement accounts, evaluate the impact of the SECURE Act on these beneficiaries, and weigh your options. For example, you might consider naming different individual beneficiaries or leaving IRAs to a charitable remainder trust or another vehicle that mimics the benefits of a stretch IRA.
Review your entire estate plan
Bear in mind that major life changes can affect other aspects of your estate plan — not just beneficiary designations. We can help point out areas of your plan that may require revisions after such a change.