What is the best form of beneficiary designation?
We hear this from many of our clients—or prospective clients. This happens when we prepare someone’s estate plan. We’ve gone through the steps of their wishes, and they’ve signed the document. We’ve explained how to title their home in the name of their trust and sign and record the deed. We’ve even given them paperwork about retitling their bank accounts, and then we get to “beneficiary designation.”
We commonly own a group of assets that allow us to keep ownership while naming a beneficiary. These are things that don’t need to be placed in a trust. For example, this could apply to life insurance policies, retirement accounts (IRAs, 401(k)s, 403(b)s), and annuities. Many banking and brokerage accounts now let people designate beneficiaries in the form called Payable on Death (POD) or Transfer on Death (TOD).
We hear a common concern when discussing beneficiary designations, especially retirement accounts. Some financial advisors tell their clients that they don’t need a trust for their IRA or 401(k) because they have already named beneficiaries. People frequently make their spouse or their children the beneficiary, so they assume they don’t need a trust for that. So why would they need to discuss these when we go over the tilting of assets?
What You’re Not Seeing
Well, you don’t have to have that discussion. You can choose whomever you want as a beneficiary. But let’s talk about what happens when your spouse or children have beneficiary designations. You’ve followed the advice of your financial advisor, and you don’t have a trust. Your spouse or children are your beneficiaries.
Now, consider a scenario where you pass away first, and your spouse survives you. When you made that choice several years ago, your spouse was in good health. In many cases, there is a significant time between when you named your spouse as a beneficiary and when you passed away. Maybe your spouse’s health has declined to the point where they need to be in assisted living or a nursing home. What happens then?
The surviving spouse will receive that money regardless of whether they are in a nursing home. There is a legal obligation to give the money to the beneficiary. The critical question you must ask yourself is whether the beneficiary is protected. The answer is simple: no. Every advisor should understand that there are potential consequences for the advice they are offering to their clients.
How We Can Protect the Beneficiaries
Because of the scenario we just outlined, we recommended that the trust be named as the beneficiary. Your trust takes into account the condition of your beneficiary. The money will go to the surviving spouse through the trust. However, the trustee can keep that money in the trust for the benefit and protection of the surviving spouse. Why? The surviving spouse’s creditors, including the nursing home, cannot reach it. You receive this protection when you title your IRA’s beneficiary designation in accordance with your trust. Beneficiary designation is a component of estate planning, not estate planning.
Build Your Estate Plan the Right Way
Titling has consequences, yet beneficiary designation from an estate planning and asset protection standpoint is one of the most overlooked but most important things you can do. It is becoming important because many financial institutions allow you to name a beneficiary. Beneficiary designation is a conversation you should have with your estate planning attorney rather than your financial advisor. Trusts are the best beneficiary designation. Contact us today to schedule a consultation to continue this conversation with an estate planning attorney.
Kevin Tharpe
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