Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Designating a beneficiary – it can be a mine field

designating a beneficiary, beneficiary, estate planning, estate taxYou met with your attorney recently to prepare your will, trust document and durable powers of attorney so you are confident your estate plan is in order. But life insurance, employer-provided retirement plans, individual retirement accounts and annuities are designed to pass at death not by your traditional estate-planning documents, but by a beneficiary designation. Disposing of property this way has benefits. Assets that pass on your death directly to named distributees by means of a beneficiary designation generally are not subject to probate proceedings. But these may be some of your most valuable assets and using a pre-printed form from an insurance company or financial institution may mask the underlying hazards.

If a surviving spouse is named as the beneficiary of the predeceased spouse’s eligible retirement plan, they have the right to roll over the plan to another eligible retirement plan. Or, if the surviving spouse is named as the beneficiary of the predeceased spouse’s IRA, they may treat the IRA as their own IRA. In both situations, distributions can be deferred until the surviving spouse reaches age 70 ½. Such deferral is generally impossible if a trust for the benefit of the surviving spouse is named instead.

If a trust having multiple beneficiaries is named as the beneficiary of a decedent’s interest in a qualified retirement plan or IRA, required minimum distributions (RMDs) will be determined using the life expectancy of the oldest beneficiary. The “separate account” rules, which ordinarily would enable each distributee’s life expectancy to be used to calculate the RMD amounts payable to each beneficiary, are not available in this circumstance.

If your beneficiaries are minors or incapacitated, the designation form may make it impossible or very difficult to designate a trust and may result in the need to appoint a guardian or conservator.

The insurance company or financial institution may not understand or be willing to follow a direction to distribute among your then living descendants per stirpes. They may consider it impractical to ascertain the identity of such descendants.

If you name a trust as the beneficiary of your life insurance or retirement plan, the designation form may require you to name the trustee of the trust. This can be a problem if the individual is no longer acting as the trustee of the trust when the beneficiary designation is to be implemented.

So, what is the solution? Whenever it’s possible or required to designate beneficiaries in a manner other than merely reciting the names of individuals, you should provide a designation using clear, unambiguous and precise language. To the extent possible, it should identify both primary and contingent beneficiaries consistent and well-coordinated with your relevant estate-planning documents.

A beneficiary designation form is a weighty estate-planning mechanism, and its completion should be treated with the same degree of care and attention as was given to the preparation of your will and trust instrument. Completion of the beneficiary designation forms should never be left to non-estate-planning professionals, so enlist the assistance of your estate planning attorney before completing beneficiary designation forms. And if your insurance company or financial institution refuses to accept a beneficiary designation form that carries out your strongly desired objectives, perhaps, you should consider moving your business to a different service provider.

Pamela Wheeler, EA