While death is a certainty, some taxes aren’t when IRAs are used to make charitable bequests, explains a thought-provoking article titled “Win an Income-Tax Trifecta With Charitable Donations” from The Wall Street Journal. For those who are philanthropically minded and tax-savvy, this is an idea worth considering.

There are few better ways to leave funds to a charity than through traditional IRAs. The strategy is especially noteworthy now, given the growth in traditional IRA values over the last decade, even with the recent selloffs in bond and stock markets. At the end of 2022’s first quarter, traditional IRAs held about $11 trillion, more than double the $5 trillion in IRAs at the end of 2012.

With the demise of defined benefit pensions, traditional IRAs are now the largest financial account many people own, especially boomers. Therefore, it’s wise to know about applicable tax strategies.

The first advantage is tax efficiency. Donors of IRA assets at death win a three-way tax prize: no tax on the contributions going to the charity, no tax on annual growth and no tax on assets at death.

Compare this to donations of cash or investments, such as a stock held in a taxable account. For example, let’s say Jules wants to leave a total of $20,000 to several charities upon her death. She expects to have more than $20,000 in each of three accounts at this time. One account is cash, the other is a traditional IRA, holding stocks and funds, and the third is a taxable investment account holding stocks purchased decades ago.

A charitable bequest of assets from any of these three accounts will bring a federal estate-tax deduction. However, Jules’ estate will be smaller than the current estate tax exemption of about $12 million, so there are no federal estate taxes to consider.

Jules should focus on minimizing heirs’ income taxes on any assets she’s leaving them and donating traditional IRA assets is the way to go. If she leaves the IRA assets to heirs, they will have to empty the IRA within ten years and withdrawals will be taxable.

Giving IRA assets gets pretax dollars directly to the charities, which don’t pay taxes on the donation. A cash donation would be after tax dollars.

Donating the IRA assets to charity is also typically better than giving stock held in a taxable account. Because of the step-up provision, there is no capital gains on such investment assets held at death. If Jules bought the now $20,000 stock for $5,000, the step-up could save heirs capital gains tax on $15,000 when they sell the shares. If she donates the stock, heirs won’t get this valuable benefit.

Next, IRA donations allow for great flexibility. Circumstances in life change, so a will that is drawn up years before death could be changed over time, to give a bequest of a different size or to a different charity. It’s easier to make these changes with an IRA. One way is to set up a dedicated IRA naming one or more charities as beneficiaries and then moving assets from other IRAs into it via direct (and tax-free) transfers. Beneficiaries and the percentages can be easily changed, and the IRA owner can raise or lower the donation by transferring assets between IRAs.

If the IRA owner is 72 or older and has to take required minimum distributions, the owner can take out donations from different IRAs. Note the funds must go directly to the charity when making the donation.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can I Use an IRA to Reduce Estate Taxes?” read also these additional articles: Do I Need a Prenup? and Can a 529 Plan Help with Estate Planning? and Can You Prevent Family Fights over Inheritance? and Top Five Estate Planning Mistakes

Reference: The Wall Street Journal (Sep. 2, 2022) “Win an Income-Tax Trifecta With Charitable Donations”

Usually when an estate planning attorney comes across an estate named as a beneficiary, all they can do is shake their heads. It’s already too late to make any changes and, in most cases, the results are bad, reports a recent article from Kiplinger that warns “Don’t Name Your Estate as Your IRA Beneficiary.”

This usually occurs because the person was in a hurry or didn’t know better.  It is sometimes because they don’t know who should become the beneficiary and are advised to just write down their estate to move the application process along. The problem comes after years go by, the account owner dies and the beneficiary designation is revealed.

The SECURE Act eliminated what was once known as the “Stretch IRA,” where beneficiaries could take withdrawals based on an IRS table of life expectancy. The SECURE Act changed how IRA distributions are made and with a few exceptions, beneficiaries have ten years to empty the account.

However, the people who are not subject to the ten-year rule include: surviving spouses, disabled individuals, chronically ill individuals and individuals within ten years of age of the original owner.

One additional exception: minor children, until they reach the age of majority, at which point they too must empty the IRA in ten years’ time.

Estates may not use the ten-year rule. They must distribute the funds in an even shorter time period: five years. There are a number of reasons to avoid this:

• The shorter the time period for withdrawals, the higher the potential for higher taxes.
• Higher income levels can lead to higher Medicare charges.
• Higher income levels can also lead to more taxes on Social Security income.
• Assets left directly to a named beneficiary have some protection against creditors.
• Assets in your estate have no protection at all against creditors.
• Higher administration costs for probate fees, legal fees, etc.
• Increased potential for a disgruntled heir to challenge your will.

The problem is solvable, if you act while you are living. Start by reviewing your accounts and identifying beneficiary designations. If you can’t find the beneficiary form, contact the institution, get a new one, complete it and submit it.

Keep in mind that if you don’t name a beneficiary of your IRA, or your beneficiary has already died (such as your spouse) and no contingent beneficiary is named, your estate is by default the beneficiary of your IRA.  Beneficiary planning is an integral part of estate planning, and many of the mistakes I see people make are improper beneficiary planning.

Reviewing beneficiaries is something to be done every three to five years, every time you review your estate plan. Don’t leave this to the last minute—take care of it now.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “What If Estate Is Beneficiary of an IRA?” read also these additional articles: Will Making a Gift Conflict with Medicaid? and Does a Beneficiary have to Pay Taxes on 401(k)? and The Risks of Creating Your Own Estate Plan and Is A Medicaid Planner Right for Me?

Reference: Kiplinger (July 27, 2022) “Don’t Name Your Estate as Your IRA Beneficiary”

There are many complicated rules for inheriting assets in the form of retirement plans, workplace plans and Individual Retirement Accounts (IRAs), says a recent article titled “How Much 401(k) Inheritance Taxes Will Really Cost You” from The Madison Leader-Gazette. Any assets passed from one person to another in the form of a 401(k) are taxable. You’ll want to be prepared.

How are Inherited 401(k)s Taxed?

The inheritance rule for 401(k) tax usually follows the same path as the rules used when making contributions or withdrawals to tax deferred retirement plans. When a person dies, their 401(k) becomes part of their taxable estate.

This means that any taxes due on earnings not paid during the person’s lifetime need to be paid.

Traditional 401(k) plans are funded with pre-tax dollars. This is great for the saver, who gets to defer paying taxes while they are working. When they retire, withdrawals are taxed at their ordinary income tax rate, which is typically lower than when they are working.

There is an exception with Roth 401(k)s, where contributions are made with after-tax dollars and qualified withdrawals are tax free.

How the IRS taxes an inherited 401(k) depends on three factors:

• The relationship between the account owner and the heir
• The age of the heir
• How old the account owner was at the time of death.

Who Pays Taxes on an inherited 401(k)?

The beneficiary who inherits the 401(k) is responsible for paying the tax. They are taxed at the heir’s ordinary income tax rate. This could push the heir into a higher tax bracket.

What Should I Do with an Inherited 401(k)?

If your spouse was the original owner, you may leave the money in the plan and take regular distributions, paying income tax on the withdrawals. You may also roll it over into your own 401(k) or to an IRA. This allows the money to continue to grow tax free, until withdrawals are taken.

Can I Avoid Taxes on an Inherited 401(k)?

The only way to avoid taxes on inherited 401(k) would be to disclaim the inheritance, at which point the 401(k) would be passed to the contingent beneficiary. If you don’t need the money, don’t want the tax headaches, or would rather see it go to another family member, this is an option. Most people pay the taxes.

Planning For Taxes When Creating an Estate Plan

Talk with your estate planning attorney about your taxable assets and how to manage the tax liabilities to your heirs. There are numerous tools to address these and related issues. your heirs will be grateful for your foresight and care.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Does a Beneficiary have to Pay Taxes on 401(k)?” read also these additional articles: The Risks of Creating Your Own Estate Plan and Is A Medicaid Planner Right for Me? and Alert: Scam Targeting Medicare Recipients and CMS Issues Updated Guidance Intended to Improve Quality of Nursing Home Care

Reference: The Madison Leader Gazette (July 29, 2022) “How Much 401(k) Inheritance Taxes Will Really Cost You”

There are many benefits to a Roth IRA, according to a recent article from Financial Advisor titled “Be Ready to Answer Questions About Roth Conversions In This Down Market.” Investors don’t pay taxes on future withdrawals and there are no minimum required distributions (RMDs) as there are for traditional IRAs and 401(k)s. Having to take an RMD after 72 and older can bump taxpayers into the next tax bracket, causing unwanted tax liability during retirement. You can also pass a Roth IRA onto an heir, as long as you meet the requirements, with no taxes to your heirs.

Why Doesn’t Everyone Have A Roth IRA?

Roth IRAs were originally created to expand the number of workers who had access to IRAs, while minimizing the short-term impact on the federal budget. They went into effect in 1998 and are named for William Roth, a U.S. Senator from Delaware. There are eligibility limits on Roth IRAs. Modified Gross Income must be under $144,000 in tax year 2022, and if married and filing jointly, MAGI must be under $214,000.

Benefits of Converting from a Traditional IRA to a Roth IRA

The best candidates for a Roth conversion are people who can afford to pay taxes due when funds are moved from a traditional IRA to a Roth IRA. Some people wait until they retire, when their income tax levels drop and paying the upfront taxes becomes more palatable.

If you don’t foresee needing all assets to pay day-to-day expenses in retirement and you have at least a moderate size IRA and brokerage account, a Roth IRA could be a good move. The same is true for someone who is years away from having to take RMDs (Required Minimum Distributions) or hasn’t yet filed for Social Security benefits.

Diversification of Tax Benefits and Burdens

If you have large retirement balances, it is often a good idea to have some that are Roth and some traditional.  So you shouldn’t convert all of your retirment funds into Roth accounts.  Why?  Because in retirement, you will have the option to “fill up” lower tax brackets  (at least the 10% and 15% brackets) with the traditional taxable retirement assets, and with the remainder, take tax-free Roth distributions putting them in the higher brackets.  This makes for good tax planning in retirement.  Your tax advisor or CPA can discuss with you an optimization program, and you can plan to take the appropriate distributions out at the end of the tax year to get the best tax result.  The point is, it is usually not advisable for your to go overboard and convert all your IRAs and 401(k)s into Roths.  Only convert some depending on what your top marginal tax bracket is at the time of conversion compared to your top expected tax bracket in retirement.  Getting a tax professional to help you with a strategy is the best approach.  So in answering the question”Is Now a Good Time for a Roth Conversion?”, you shouldn’t convert all of them into Roths.

Who Shouldn’t Do a Roth Conversion?

Most people who are working shouldn’t do a Roth conversion. Instead, they should wait until they are in a lower tax bracket before taking funds from an IRA, 401(k), SEP or other tax deferred accounts. Investors with modest IRAs and brokerage accounts won’t benefit as much as a Roth account.

When possible, conversions should also be done in smaller amounts, staggered over the course of several years.

Roth conversions are an excellent tool for estate planning. Heirs of Roth IRAs aren’t taxed on withdrawals, while they are taxed on withdrawals from traditional IRAs and have only a ten-year window in which to empty traditional accounts.

Speak with your estate planning attorney before embarking on a Roth conversion to be sure it is the best move for you from a tax and estate planning perspective. Aligning a Roth conversion with your estate plan will yield the best results.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Is Now a Good Time for a Roth Conversion?” read also these additional articles: What Does a Funeral Cost These Days? and Will Drinking Milk Prevent Dementia? and What are Mistakes to Avoid with Beneficiary Designations? and Are Testamentary Trusts a Good Idea?

Resource: Financial Advisor (July 6, 2022) “Be Ready to Answer Questions About Roth Conversions In This Down Market”

Many people don’t know that their will doesn’t control who inherits all of their assets when they die. Some assets pass by beneficiary designation. Assets like life insurance, annuities and retirement accounts all pass by beneficiary designation.

Kiplinger’s recent article entitled “Beneficiary Designations: 5 Critical Mistakes to Avoid” lists five critical mistakes to avoid when dealing with your beneficiary designations:

1. Failing to designate any beneficiary at all. Many people forget to name a beneficiary for retirement accounts or life insurance. They may forget, didn’t know they had to, or just never got around to filling out the forms. If you don’t name a beneficiary for life insurance or retirement accounts, the company will apply its rules about where the assets will go after you die. For life insurance, the proceeds will typically be paid to your probate estate. For retirement benefits, if you’re married, your spouse will most likely receive the assets. However, if you’re unmarried, the retirement account will likely be paid to your probate estate, which can have negative asset protection ramifications.
2. Failing to consider special circumstances. Not every family member should get an asset directly. This includes minor children, those with specials needs and people who can’t manage assets or with creditor issues.  Unless you trust the parent(s) of the minor child, consider leaving that child’s share of the asset to a trust for the child and not to the child directly.
3. Misspelling a beneficiary’s name. Beneficiary designation forms can be filled out incorrectly and the beneficiary designation form may not be specific. People also change their names through marriage or divorce, or assumptions can be made about a person’s legal name that later prove incorrect. Failing to have names match exactly can cause delays in payouts, and in a worst-case scenario of two people with similar names, it can result in a court case.
4. Forgetting to update your beneficiaries. Your choice of beneficiary may likely change over time as circumstances change. Naming a beneficiary is part of an overall estate plan, and just as life changes, so should your estate plan. Beneficiary designations are an important part of that plan—make certain that they’re updated regularly.
5. Failing to review beneficiary choices with legal and financial advisers. How beneficiary designations should be completed is a component of an overall financial and estate plan. Involve your legal and financial advisers to determine what’s best for your circumstances. Note that beneficiary designations are designed to guarantee that you have the ultimate say over who will get your assets when you pass away. Taking the time to carefully (and correctly) choose your beneficiaries and then periodically reviewing those choices and making any necessary updates will allow you to remain in control of your money.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “What are Mistakes to Avoid with Beneficiary Designations?” read also these additional articles: Are Testamentary Trusts a Good Idea? and IRS Extends Time to File Portability Exemption Relief to Five Years and Can I Use a Special Needs Trust? and How to Plan in a Time of Uncertainty

Reference: Kiplinger (June 6, 2022) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

Conversations about death and legacies aren’t always easy. However, defining what matters most to a person is a good way to start estate planning. IRAs can play an important role in estate planning and legacy creation, as discussed in a recent article entitled “IRA Gifts at Death” from The Street.

Let’s say someone has a large portion of their assets in an investment account, a Roth IRA and a traditional IRA. If they want to avoid having their estate go through probate but aren’t in love with the idea of building trusts, they need to be sure their IRAs have beneficiaries. At their passing, the assets will flow directly to the beneficiaries.

Make sure that at least one living beneficiary is on the account. If the primary beneficiary is a spouse, be sure to also have contingent beneficiaries, or designate the beneficiary as “per stirpes,” which means if the named beneficiary passes before the account owner, their share of the assets automatically passes to their lineal descendants.

If there’s no valid beneficiary, the contents of an IRA of any kind could end up in the probate estate, creating a nightmare for heirs.

If an intended beneficiary is a charitable organization, passing an IRA is a powerful giving strategy. The organization must be a 501(c)(3), a tax-exempt organization. When IRAs are passed to the charity, the charity doesn’t pay taxes on the gift.

Individual beneficiaries do have to pay taxes on assets received from traditional IRAs, and when and how much they pay depends upon their relationship to the IRA owner. If the recipient is not the spouse, not a minor and not a disabled adult, the heir will need to take taxable withdrawals from the traditional IRA over the course of ten years from the date of death of the original account owner. Some people take a set amount annually, so they can plan for the taxes due. For others, a low-income year is the time to take withdrawals, since their tax bracket may be lower.

Another IRA distribution strategy is to divide IRAs into separate accounts, allowing for increased control over the amount of assets passing to a specific beneficiary. One IRA could be used for your charitable giving, while another IRA could be used to benefit family members.

Changing beneficiaries on your IRA is relatively easy. Checking on beneficiary names should be done every time you review your estate plan, which should happen every three to five years. Your estate planning attorney will be able to help determine the best strategy for your IRAs. Generally speaking, traditional IRAs are best to gift for charities. Roth IRAs are best to gift to family or loved ones. This is because the money in a Roth IRA is inherited tax free and can remain tax free for a number of years.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can You Leave an IRA to a Beneficiary?” read also these additional articles: What Is the Purpose of a Exemption Trust? and Did Former NFL Tackle and Fox Sports Commentator Tony Siragusa have an Estate Plan? and What are Seniors Doing to Afford Health Care? and Do You Lose Benefits If You Retire Early?

Reference: The Street (July 17, 2022) “IRA Gifts at Death”

IRAs are valuable tools for retirement savings because they offer tax benefits in exchange for putting aside money for your golden years. Money Talks News’ recent article entitled “8 Ways to Maximize Your Traditional or Roth IRA” explains that contributions to IRAs are capped at $6,000 per year for most people, and that can make it difficult to amass the $1 million some people suggest is needed for retirement. Nonetheless, you can maximize your IRA contributions – both this year and over time – by using these ideas.

1. Know your IRA options. See if you’re eligible to open a specialized IRA with a higher contribution limit. Self-employed people can also contribute to a SEP IRA. These Simplified Employee Pension plans let workers save 25% of their compensation.
2. Don’t forget about the catch-up contributions. When you reach 50, you’re eligible to make catch-up contributions to traditional and Roth IRAs. It’s another $1,000 a year. Therefore, everyone age 50+ can contribute a total of $7,000 to their IRA for 2022.
3. Take advantage of a spousal IRA. You typically need to earn taxable income to contribute to an IRA. However, there’s an exception for spouses. A non-working spouse can set up and contribute to an IRA, as long as their spouse has taxable income. However, if you file your taxes separately, you’ll miss out on this opportunity. Your total IRA contributions also can’t exceed the taxable income reported on your joint return.
4. Make regular contributions throughout the year. If you wait for a year-end bonus to make your annual IRA contribution, you might be shortchanging yourself. Try to make small monthly contributions. Known as dollar-cost averaging, this makes saving money a habit and can result in more efficient investments. It may help your IRA grow more quickly.
5. Start contributing as early as possible. It’s never too early to begin saving for retirement, so open an IRA as soon as you’re able and start your deposits as early in the year as possible.
6. Look into a Roth conversion. Both traditional and Roth IRAs offer tax advantages. However, they differ. A traditional account offers an immediate tax deduction on contributions and then taxes withdrawals in retirement as regular income. With a Roth, there’s no tax deduction for contributions. However, the money is tax-free in retirement. If you have a traditional IRA, you can convert it to a Roth account.
7. Invest for the long term. As far as your money in your IRA, “set it and forget it.” Moving it around frequently could incur fees and selling off investments during a down market simply means you’ll be locking in losses. Determine the appropriate investment strategy for your goals and risk tolerance and then stay with it. And remember that you may have to ride out some short-term bumps in the market to maximize your long-term gains.
8. Talk to an expert. For savvy investors and those with the time and inclination to research investment choices, managing an IRA can be a viable option. For others, using a professional can save time and may result in better returns.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “How Do I Maximize My IRA?” read also these additional articles: Can My Pet Help Me in Old Age? and Can New Program Help Dementia Patients? and RMD Formula Changes for First Time in 20 Years and Dynasty Trusts: A Tax-Efficient Way o Pass Wealth Down Through the Generations

Reference: Money Talks News (Dec. 20, 2021) “8 Ways to Maximize Your Traditional or Roth IRA”

For the first time in two decades, the IRS has updated actuarial tables used to determine Required Minimum Distributions, the amount taxpayers are required from their retirement accounts starting at age 72, reports Yahoo! Money in the article “Good News for Retirees: RMD Formula Changes for First Time in Decades.”

The new tables rely on longer lifespans to calculate RMDs from tax deferred accounts, including traditional IRAs, 401(k)s and other similar retirement accounts every year.

One of the key benefits of retirement accounts are the tax advantages they offer. Traditional IRAs and 401(k)s allow savers to defer taxes until funds are withdrawn, letting their investments grow over an extended period of time. However, as with all good things, there are limits. To encourage people to take funds from the accounts (which generate tax revenues), the IRS requires a certain amount of money be taken out after a certain age.

The age requirements have changed over the years. Before the SECURE Act of 2019, withdrawals were required starting at age 70.5. After the SECURE Act, if you reached age 70.5 in 2019, the prior rules applied, and you had to take the first RMD by April 1, 2020. However, if you reached 70.5 in 2020 or later, the first RMD needs to be taken by April 1 in the year after you reach age 72.

Here are the accounts subject to RMDs:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k), retirement plan from private sector employers
• 403(b), retirement plan for public employees and nonprofits
• 457(b), retirement plan for some state and local government employees

Profit sharing plans and other defined contribution plans are also included in this category. Roth IRAs are not subject to RMDs.

With the IRS raising the average life expectancy from 82.4 to 84.6, retirees will also need to make their retirement savings account last longer. Therefore, the RMDs starting in 2022 will be less than those from the prior calculation, which has been the same since 2002. Smaller RMDs will also lower tax liabilities and might even put some people into a lower tax bracket.

You can still withdraw as much as you like from an IRA or the accounts listed above. However, be mindful of the resulting tax bill.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “RMD Formula Changes for First Time in 20 Years” read also these additional articles: Dynasty Trusts: A Tax-Efficient Way to Pass Wealth Down Through the Generations and What Does An Executor Do? and How to Deal with an Estranged Child in Your Estate Plan and Should a Reverse Mortgage Be Used for Long-Term Care?

Reference: Yahoo! Money (June 15, 2022) “Good News for Retirees: RMD Formula Changes for First Time in Decades”

If you’re married, unless there are very unusual circumstances, your spouse should be the beneficiary, especially if you live in a community property state like Louisiana.

A community property state is a state where any asset acquired during marriage is considered to be community property, which means it’s equally owned by each spouse. Any income that either spouse makes during the marriage is community income.

However, there are exceptions that permit spouses to own assets separately from each other. Gifts, inheritances and assets acquired before the marriage are all considered separate property.

There are only nine community property states, plus three states that allow residents to opt into community property law. The other 38 states plus Washington D.C. follow a common law property system where ownership of marital assets is more straightforward: whoever acquired the property owns it outright. However, a couple can choose to become joint owners, such as through a joint bank account.

If you’re now wondering which states are community property states, they are Louisiana, Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington and Wisconsin.

If you’re single, you might have a tougher time naming a life insurance beneficiary.

If you have minor children, ask a lawyer about naming a trust as beneficiary.  This is because a minor use of the proeperty will devolve to the other parent.  This can be often be problematic if you are not married, or the other parent of your child is estranged from you.  If a trust is the beneficiary of the policy, you can name a trusted family member as the trustee of the trust until you child reaches the appropriate age for distribution of assets from the trust.  The distribution can be made in “ages and stages”, over time, if you like.

If you have a disabled family member, consider a special needs trust (“SNT”).  A special needs trust (SNT) will allow the funds in the trust to be used for the disabled family member without kicking the disabled family member off of needs based programs.

If you don’t have a trust, you can name an adult family member or any other trusted person. However, remember that if you name an adult family member, once the proceeds are paid, those funds legally belong to that individual. Therefore, you better really trust that person and make certain that he or she understands that the funds need to be used for the intended minor child/children.

Finally, when making your decision, do so as if this account would be paid out tomorrow.

You should always consult with an estate planning attorney.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “How Do I Pick a Life Insurance Beneficiary?” read also these additional articles: How Do Estate Plans and Trusts Work? and What Should I Know About Buying Funeral Services? and Medicaid’s “Snapshot” Date and Its Crucial Impact on a Couple’s Financial Picture and Claiming Social Security Benefits at Age 70

Reference: Cision (May 20, 2022) “How to Choose a Life Insurance Beneficiary”

The beneficiary designation will always supersede language of your will. Neglecting to know which assets have beneficiary designations and failing to update the designations can undo even the best estate plan.

The beneficiary designation for your life insurance, annuity, or retirement account custodian provides an opportunity to tell the company who is to receive life insurance proceeds, annuity, or retirement savings upon your death, explains a recent article titled “This Important Estate Planning Step is Often Missed” from Coeur d’Alene/Post Falls Press. If these are not coordinated with a last will and testament, the results are problematic at best, and worse, financially, and emotionally devastating.

This epic fail comes in many different forms, but the most common is when a life insurance policy has never been updated and an ex-spouse receives the policy proceeds. The rules differ between retirement accounts and life insurance and can be impacted by various state and federal laws (and the divorce decree, if the life insurance policy was included). However, for the most part, the ex will receive the proceeds and litigation will not succeed.  This is because the beneficiary designation is a contact between you and the insurance company or retirement custodian.  They are required by contract to pay to the person named in the beneficiary designation, and this is why such proceeds to not go through probate.

Occassionally, a person will die without having named a beneficary.  This most often occurs when a person named a spouse as beneficiary, but that spouse died and a contingent beneficiary was not named.  In such a case, the proceeds must by law be paid to the estate, and in this case the funds do go through probate.  This can be problematic for two reasons. First, life insurance and retirement accounts are “asset protected” under federal and/or state law.  However, if the funds go through probate, the creditors of the estate will have a chance to get the assets.

Example.  Bill has a life insurance policy.  He named his wife as beneficiary of the policy and did not name a contingent beneficiary.  His wife died last year and Bill has not updated the beneficiary designation. Bill dies in a car accident in which he was at fault.  Bill’s estate is liable to the “injured person” for damages and a personal injury attorney is hired by the “injured person” to extract as much wealth from Bill’s estate as possible.  Normally, if Bill had named a beneficiary, the life insurance proceeds would be go directly to the beneficiary and would be protected.  However, because Bill’s beneficiary designation lapsed (he did not have a beneficiary), the policy proceeds are payable to Bill’s estate, and the “injured person” can make a claim on the policy proceeds that are funneled through the estate.

Another common beneficiary designation mistake is when a person has created a living trust or revocable trust to prevent assets from going through probate when they die. Probate can take many months to complete and there are several strategies used to take assets out of the probate estate.

When the living trust is established and assets are transferred into the trust, those assets do not pass through probate.

However, if a person (or married couple) established a living trust and fails to list both primary and secondary beneficiaries for life insurance and/or retirement accounts, it is entirely possible that the assets will go through probate.  In such a case, the person should name the trust as the beneficiary of the policy.  This can protect the assets even if paid out to the trust depending on the asset protection features of the trust (for example, if the trust is an irrevocable trust).  If done incorrectly, payouts of life insurance policies can have a significant impact on Medicaid long-term care planning as well.

Take the time to make an inventory of all assets and accounts. Determine which ones have a beneficiary designation and find out who is named as the beneficiary. If your retirement accounts and life insurance policies were established decades ago, this is especially important.

Failing to coordinate beneficiary designations with your estate plan could undermine your wishes. Review these items with your estate planning attorney to avoid these and many other potential pitfalls.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “Why Is Beneficiary Designation Important?” read also these additional articles: Does Diabetes Increase Chances of Suffering from Dementia? and Protecting Your House from Medicaid Estate Recovery and How Do I Plan for Taxes after Death? and How to Find a Great Estate Planning Attorney

Reference: Coeur d’Alene/Post Falls Press (May 23, 2022) “This Important Estate Planning Step is Often Missed”