With the recent passing of Robin Williams and Joan Rivers, a lot of attention is being focused on estate planning.
I was reviewing my wife and my assets not too long ago and reconfirmed a conclusion I arrived at several years ago when we initially began doing estate planning: our wishes as expressed in our will and our living trust are totally irrelevant when it comes to how a large portion of our estate will be distributed when we’re no longer here.
How is this possible? The remainder of this article is devoted to answering this question.
Beneficiary form accounts
50% of the current value of my wife and my estate is owned by our revocable living trust and will be distributed to our beneficiaries in accordance with the terms of our trust when we die. The transfer of the remaining 50% of our estate is controlled by several one- or two-page beneficiary forms we completed at various times with different financial institutions.
My wife’s and my situation isn’t unusual. The assets associated with beneficiary forms can represent a sizable portion of one’s estate and are often overlooked in the estate planning or settlement process.
Beneficiary form accounts, or accounts on which you can name one or more beneficiaries, include the following four types of accounts:
- Retirement accounts
- Life insurance
- Bank or brokerage payable on death (POD) or transfer on death (TOD) accounts
When you complete annuity, retirement, life insurance, or POD or TOD applications, they usually include a beneficiary section where you name your beneficiaries, including desired distribution percentages. A stand-alone beneficiary form will typically be available for two types of situations: (1) the number of beneficiaries is limited on a financial institution’s application, or (2) to make changes to existing beneficiary designations.
In addition to designating primary beneficiaries and desired distribution percentages, it’s important to also name contingent beneficiaries in the event that any primary beneficiaries predecease you.
Beneficiary forms control
Beneficiary form designations override the beneficiary sections of wills and living trusts for the assets or life insurance with which they’re associated. In addition to determining who will receive each asset or the proceeds of a particular life insurance policy, they allow for individual assets or life insurance to avoid probate provided that the named beneficiary isn’t the deceased or the deceased’s estate.
Probate assets are subject to a court-supervised process that exposes them to potential executor and attorney fees, a delay in transferring assets to intended beneficiaries, and public scrutiny. Assets controlled by beneficiary forms where the deceased or the deceased’s estate isn’t the beneficiary can generally be transferred fairly quickly with minimal paperwork and expense while maintaining privacy.
What happens if either (a) you fail to name a beneficiary or (b) a primary or contingent beneficiary that you name doesn’t survive you? In this situation, the terms of the account or life insurance policy and potentially state law will control who receives the asset or life insurance proceeds.
Coordinate beneficiary form designations with estate planning documents
The completion of beneficiary sections and forms is often done quickly without much thought or coordination with the beneficiary provisions of one’s formal estate-planning documents. Furthermore, unlike formal estate-planning documents, which are generally discussed and signed in the presence of an estate attorney and both spouses, if married, this generally isn’t the case when it comes to beneficiary forms, especially those used by employee retirement plans.
It’s a good idea to consult with an estate attorney when completing original or amended beneficiary sections of applications or beneficiary forms to make sure that (a) the particular asset, or portion of the asset, will be distributed to your intended beneficiary(ies), and (b) the transfer of the asset will be in accordance with your wishes for the distribution of your overall estate. In addition to providing you with advice regarding your beneficiary forms, your estate attorney may recommend changes to your existing estate planning documents as well as preparation of new documents to fulfill your wishes.
Systematize and review beneficiary designations periodically
Copies of original and amended beneficiary forms should always be made and retained in a secure beneficiary file in paper form or online. This should include written acknowledgment of receipt for original beneficiary designations for retirement plans and for all beneficiary changes. A written receipt isn’t necessary for original beneficiary designations for annuities and life insurance since copies of the applications, including beneficiary designations, are generally included as part of annuity and life insurance contracts.
Your estate planning attorney, financial planner, or you should create and maintain a system for organizing the beneficiary designations for all of your assets and life insurance policies. This should include designations that are governed by your formal estate planning documents, beneficiary forms, quit claim deeds, joint tenancy designations, and other legal documents.
Your system should be reviewed periodically with your estate-planning team. In addition to copies of original and amended beneficiary forms and documents acknowledging receipt of original beneficiary designations and changes, it should include a dated beneficiary report.
The report should be updated whenever your marital status changes, a new family member is born or adopted, a beneficiary dies, you complete a beneficiary form, have a new or amended estate-planning document prepared, inherit or receive a gift of any assets, or purchase or sell real estate, a business, or valuable intangible or personal property.
Your beneficiary report should list each of your life insurance policies and assets, including, but not limited to, bank accounts, nonretirement and retirement investment accounts, real estate, businesses, intangible property, and personal property. The following information should be included for each item:
- Ownership, i.e., individual, joint tenancy, living trust, etc.
- Documents and document sections controlling estate transfer, including execution date and location of each document
- Applicable quit claim deeds in the case of real estate
- Primary and contingent beneficiaries, including percentages
- Current value as of report date
- Liabilities associated with individual assets, e.g., mortgages, auto loans, etc., and current balances
Who gets your assets when you die?
As you can see, the answer to the question, “Who gets your assets when you die?,” cannot be answered in most cases by simply reviewing the beneficiary section of your will and living trust, assuming that these documents have been prepared for you.
Beneficiary forms play a crucial role, and often supersede wishes as expressed in your will and other formal estate-planning documents for certain types of assets and life insurance policies.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.