One part of Estate Planning that I cannot control is the beneficiary designations on your Life Insurance and Retirement Accounts (IRA, 401k, etc). No matter what I write in your Will or Trust, it cannot change who gets those retirement accounts. This is accomplished with a Beneficiary Designation form held by the account custodian. You should have filled one out when you opened the account, and you can do a new one any time to update it.
The trouble is that you can mess things up if you don’t enter the right beneficiaries or if you don’t coordinate your beneficiary designations with your other estate planning documents (your Will or Trust). Worse, you can do what you know is right and the account custodian (the bank or financial company holding the account) can mess it up for you.
One of the main problems that people encounter is poorly crafted beneficiary designation forms. You need to name a Primary Beneficiary for your accounts, and you also need to name a Contingent or Alternate Beneficiary, in case your primary beneficiary dies before you do. If you have time, you can update your form after a named beneficiary dies, but you might not have time. So, the Contingent Beneficiary is very important. But, what if the primary and contingent beneficiary both die before you? What happens then?
This is where most custodians and their poorly written forms will fail you. You should be able to use a legal designation like “my issue” and “per stirpes” or “by right of representation”, but those terms aren’t always on the forms. You can ask for help, but the representatives of those companies don’t always know the right thing to do.
What you want to do, usually, is name your spouse as primary beneficiary, and name your children (in equal shares) as contingent beneficiaries, and your grandchildren as second contingent beneficiaries. You should use language like, “to my children or other issue, per stirpes.” This legal language means that each living child would get an equal share, while the children of a deceased child (your grandchildren) would share (equally between them) in their parent’s share. If a child died without children, the shares would be divided equally among the surviving children.
The worst thing you can do (for income-tax purposes at least) is to fail to have a living beneficiary or to name your estate as beneficiary. Your family will lose the ability to spread out the required withdrawals over an individual life expectancy. More tax is usually paid when this happens. So, you should review all of your beneficiary designations right now. File new forms for any that are wrong or doubtful. If the form doesn’t have a check box for children and “issue” or for a “per stirpes” distribution, then you need to write in those words yourself.
The trouble is that you can mess things up if you don’t enter the right beneficiaries or if you don’t coordinate your beneficiary designations with your other estate planning documents (your Will or Trust). Worse, you can do what you know is right and the account custodian (the bank or financial company holding the account) can mess it up for you.
One of the main problems that people encounter is poorly crafted beneficiary designation forms. You need to name a Primary Beneficiary for your accounts, and you also need to name a Contingent or Alternate Beneficiary, in case your primary beneficiary dies before you do. If you have time, you can update your form after a named beneficiary dies, but you might not have time. So, the Contingent Beneficiary is very important. But, what if the primary and contingent beneficiary both die before you? What happens then?
This is where most custodians and their poorly written forms will fail you. You should be able to use a legal designation like “my issue” and “per stirpes” or “by right of representation”, but those terms aren’t always on the forms. You can ask for help, but the representatives of those companies don’t always know the right thing to do.
What you want to do, usually, is name your spouse as primary beneficiary, and name your children (in equal shares) as contingent beneficiaries, and your grandchildren as second contingent beneficiaries. You should use language like, “to my children or other issue, per stirpes.” This legal language means that each living child would get an equal share, while the children of a deceased child (your grandchildren) would share (equally between them) in their parent’s share. If a child died without children, the shares would be divided equally among the surviving children.
The worst thing you can do (for income-tax purposes at least) is to fail to have a living beneficiary or to name your estate as beneficiary. Your family will lose the ability to spread out the required withdrawals over an individual life expectancy. More tax is usually paid when this happens. So, you should review all of your beneficiary designations right now. File new forms for any that are wrong or doubtful. If the form doesn’t have a check box for children and “issue” or for a “per stirpes” distribution, then you need to write in those words yourself.
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