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What You Need to Know About Beneficiary Designation

estate planning legacy planning

The Importance of Beneficiary Selection/Designation
You have worked hard earning and saving your assets, and you should give the same care and consideration to planning how your assets will transfer at your death. Selecting beneficiaries and creating an estate plan with your financial advisor and estate attorney can help you fulfill your wishes, prevent delays for your heirs, and potentially guide your heirs from the grave.

How Do Assets Transfer?
There are a variety of ways that assets can transfer at death. One common method is through survivorship when an asset is held jointly with a spouse. Naming a beneficiary on the account and/or asset paperwork is another way an asset can transfer at death. If a Trust has been created or is created at death, the assets will transfer according to the terms of the trust. 

Finally, a will can be used to transfer assets at death. According to a 2020 survey by Caring.com, only one-third of Americans have a will. If you die without a will, the laws of the state determine how your assets are allocated, and it may not be how you wish! While it may not be obvious at first, it is critical that your financial advisor understands the interaction between each of these pieces. In fact, in many cases the beneficiary forms on your accounts OVERRIDE what is written in a will. This shows how powerful beneficiary selection is and why your financial advisor needs to be well-versed in your estate plan.

When Should I Review Beneficiaries?
Beneficiaries should be reviewed when major life events occur at a minimum. These events include birth, death, marriage, divorce, re-marriage, or when the tax law changes. While updating beneficiaries may not feel urgent during these life events, it certainly needs to be addressed.

After an eight-year court battle in the Kennedy v. Plan Administrator for DuPont Savings and Investment Plan case, the U.S. Supreme Court unanimously held that a retirement account should be paid to the ex-wife of a plan participant because she was never removed as the beneficiary after their divorce. The ex-wife even waived her rights to the account in the divorce settlement, but the Beneficiary Form (not a will or divorce decree) directs the flow of assets at death.

What Is a Contingent Beneficiary? Do I Need One?
A contingent beneficiary is a secondary beneficiary, or the next in line to receive the asset after the primary beneficiary. A contingent beneficiary receives the asset if the primary beneficiary has already died, or if they disclaim or refuse the inheritance. If a contingent beneficiary is not named, the asset may pass to your estate.

Who Can I Choose as Beneficiary?
Generally, you can name any individual or entity as your beneficiary and divide your assets among multiple primary or contingent beneficiaries. Some states require a spouse to sign a waiver when they are not listed as beneficiary; but it is not uncommon for this to be part of an overall estate plan. Each beneficiary may be named in equal percentages (50% to child 1 and 50% to child 2) or in unequal percentages (75% to child, 12.5% to niece, and 12.5% to nephew).  You can also choose a beneficiary that is not a person but an entity, like a charitable organization or a trust.

Do I Need a Trust? What Do I Need to Consider If I Choose a Trust as a Beneficiary?
Creating a trust can be motivated by any number of factors, but here are some questions to consider as you create a comprehensive estate plan:

  • How is the trust going to be created?
    • Discussions with your estate attorney and financial advisor can help frame your thoughts. Should the trust be created now? Or should it be created by your will at your death?
  • Who is going to be the Trustee?
    • A trustee can be almost anyone you trust. This could be a trusted family member, a business partner, or another third party that administers the management and distribution of the assets
    • The trustee has fiduciary responsibility, which means they have to act in the best interest of the trust and its beneficiaries
  • What is going to be the distribution schedule for the assets?
    • In what situations do the trustees have discretion over distributing assets? In what situations do the beneficiaries have discretion?
    • Is the trustee required to make distributions of income or principal?
    • What is the procedure should the beneficiary request additional funds from the trustee/trust?

Selecting and updating beneficiaries has always been important. But as families become more blended and non-traditional living arrangements are becoming the norm, appropriate beneficiary designation has become a vital piece of your estate plan.

Please contact McKinley Carter if you need help considering or changing beneficiaries. Our advisors are not estate planning attorneys; however, we have legal expertise among our team members and would be happy to  discuss your options regarding wills and trusts, as well as refer you to estate planning attorneys we have worked with in your geographical area.

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