Be Sure About Beneficiaries
As described in the March 2011 CPA Client Bulletin, the new tax law greatly reduces exposure to federal estate tax for most individuals and families. However, the new law does not remove the need for all estate planning.
You’ll need a thoughtful estate plan to ensure that your assets go to the desired recipients with a minimum of time, expense, and contention. Your estate plan should begin with a will that was drafted by an experienced attorney. Whenever there is a major change in the law—such as for this year—you should review your will to make sure it still expresses your wishes. The same is true after major life events: births, deaths, marriage, and divorce.
Beyond your will You also should be aware that some assets generally do not pass under your will. Instead, they will go to a beneficiary you name. That’s true for employer-sponsored retirement plans, individual retirement accounts (IRAs), life insurance policies, and annuities. Some investment accounts and savings accounts also belong to this group if they are transfer-on- death or payable-on-death accounts.
To see how this might work, suppose that Dan Smith creates an IRA when he begins his working career. He names his sister, Beth, as the beneficiary. Many years later, Dan has a substantial amount in his IRA, as well as other assets. When Dan creates a will as part of his estate plan, he states that all of his assets should go to his nephew, who is supporting a family on a modest income. Dan does not include his sister in his will because Beth has substantial assets of her own.
However, Dan has neglected to change his IRA beneficiary, in this scenario. At his death, his IRA will pass to Beth, who is still the designated beneficiary. For Dan’s IRA assets, his will is disregarded.
Supreme Court’s view
If you think the Dan Smith example is unlikely, consider this real-life story. An employee at a major U.S. corporation was divorced. In the divorce agreement, the employee’s wife relinquished all claims to his company benefits. The employee, however, did not change the beneficiary designation on his account in the company’s savings and investment plan.
The employee died several years later, with about $400,000 in this plan. The company paid all the money to the ex-wife, who was still the designated beneficiary. The deceased employee’s estate sued the company, and, in 2009, the U.S. Supreme Court unanimously ruled for the company (Kennedy v. Plan Administrator for DuPont). The employee’s failure to revisit his beneficiary selections thwarted his estate plan.
Check and keep checking
As previously mentioned, you should create a will and revisit it periodically. The same is true for your beneficiary selections. Check them at regular intervals to make sure that the people you have named are still the ones you’d like to inherit those assets.