With the current super-generous federal estate tax exemption of $11.4 million, estate planning may be completely off your radar.
After all, with that huge exemption, you may think there’s no way your estate would owe any federal estate tax if you happen to die—expectedly or unexpectedly. Is your thinking right?
You should probably take one very important estate planning action as soon as you finish reading this.
Check the beneficiary designations for your
• bank accounts,
• brokerage firm accounts,
• tax-favored retirement accounts,
• company benefit plans,
• life insurance policies,
• annuities, and
• 529 college savings accounts.
If you’ve not yet turned in the forms to designate beneficiaries, please do it now. If the forms are out of date, change them to reflect current reality before it’s too late.
If you need motivation, here are two real-life horror stories to light a fire under you.
Real-Life Horror Story 1
Dad failed to change the beneficiary designations for his Boeing Corporation pension benefits and life insurance after his divorce, so Dad’s ex was still the named beneficiary.
Two months later, Dad died in a car crash. The Supreme Court ruled 7-2 that the beneficiary designations trumped a state law that would have automatically disinherited the ex. So the ex got the money, and the kids got the bills for an unsuccessful legal fight that went all the way to the Supreme Court. Oops!
Real-Life Horror Story 2
In another real-life case, the ex-spouse collected $400,000 from Dad’s company savings and investment plan even though the ex had specifically waived any interest in the plan under the divorce agreement.
Believing the divorce agreement was the last word on the subject, Dad failed to turn in the form to officially change the plan beneficiary from his ex to his daughter.
He died seven years after the divorce. The company plan document stipulated that beneficiaries could be changed only by submitting the required form.
The Supreme Court unanimously ruled that the hideously outdated beneficiary designation trumped the divorce agreement. So the ex got the $400,000, and the daughter got stiffed. Oops!
The two Supreme Court decisions were not even close calls. Pay attention to your beneficiary designations.
The Disaster Avoidance Message
Divorce is not the only situation where failing to turn in or update beneficiary designation forms can cause big problems for your intended heirs—it’s just the most obvious situation.
For example, the same basic issue exists if you become disenchanted with an adult child who has decided to become a professional Frisbee golfer on top of marrying someone you can’t stand.
Or you might now decide to leave more of your life insurance benefits to an adult child who just had twins and less to your childless offspring.
You get the idea. When things in your life change, you may need to refresh your beneficiary designations.
Another big reason to designate beneficiaries: it avoids probate. Also, consider naming contingent beneficiaries. These are individuals who stand in line behind your primary beneficiaries.
Do not rely on a will or living trust document to override outdated beneficiary designations. As a general rule, whoever is named on the most recent beneficiary form (which may not be nearly recent enough) will get the money automatically when you die—regardless of what other documents might say.
How to Update Beneficiary Forms
Bank and Brokerage Firm Accounts
Fill out and submit a transfer on death (TOD) or payable on death (POD) form to name or change beneficiaries.
Tax-Favored Retirement Accounts, Employer-Sponsored Benefit Plans, Life Insurance Policies, and Annuities
Fill out and submit beneficiary designation forms to name or change beneficiaries.
529 College Savings Accounts
Fill out and submit a beneficiary change form to change the account beneficiary.
Special Considerations If You’re Married
In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), your spouse’s consent may be required to make beneficiary changes to things like investment accounts, because most assets accumulated during the marriage are considered to be owned 50-50 by the spouses.
If you are married and have set up assets with you and your spouse named as joint tenants with right of survivorship (JTWROS), your spouse will automatically take over sole ownership when you die.
This is a common ownership arrangement for real property, and it has the advantage of avoiding probate. So you may want to retitle some assets to be held as JTWROS.
Check your designations at least once a year or whenever significant life events occur.
It usually takes only a few minutes to conduct a checkup and make any needed changes. Often you can access the necessary forms online. But if you wait, it could be too late, as illustrated by the real-life horror stories presented earlier. Don’t wait!
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.