by KaNeil Menlove, VP Operations
Are your Beneficiaries Listed Correctly?
Hello again! I am excited to write again for the Paragon Quarterly Newsletter. I thought it might be another ten years before being asked to write again, but nope! Here I am, just one year later, writing another article.
As I considered a number of topics that I could write about, the thought of estate planning kept coming to mind—specifically, about beneficiaries. While Paragon is not in estate planning, we complement and help fulfill many of our clients’ legacy plans.
This topic also launched to the forefront when I came across an article in the Wall Street Journal. This article is titled, “His Ex Is Getting His $1 Million Retirement Account. They Broke Up In 1989.” Written by Ashlea Ebeling. The article discusses how Jeffrey Rolison and Margaret Sjostedt dated in the 1980s and then broke up. While they were dating, Jeffrey listed Margaret as the sole beneficiary of his retirement savings account with his employer. Jeffrey never updated his beneficiaries throughout his career. He passed away in 2015, single and childless. His brothers assumed the assets in Jeffrey’s retirement account listed themselves as the beneficiaries. You can imagine the shock when the brothers discovered who was Jeffrey’s beneficiary. Due to the multiple claims on the assets, it ended up in court. During the course of the legal battle, a federal court found that the assets be awarded to Margaret, not his brothers. At the time of the article, the assets were placed in escrow account while the brothers could appeal the decision.
Why do I share this extreme example of not updating beneficiaries? You may have already guessed it, but here at Paragon, we want to make sure that your beneficiaries match your legacy plan. For example, several years ago, we received phone calls from two clients’ children. Both conversations were very similar. They were calling to inform us that their parent (our client) had passed away.
As part of my job, I usually work with a spouse or family member who has been assigned as the executor after a client has passed away. I gather the necessary information and paperwork, answer any questions about the paperwork, and submit the paperwork to Schwab. Then, the assets get distributed to the beneficiaries. The smoother I can make this transition for them, the better.
That brings me to the first phone call I received about one of our client’s passing. After the son had phoned to inform us of his mother’s passing, I started to review her accounts, more specifically, the beneficiaries listed on her account and a copy of her trust. About a year before her passing, I remembered that she updated the beneficiaries on her IRA accounts and the signers on her trust account. Having this updated within the previous year helped tremendously. Her financial assets were distributed seamlessly according to how she wanted.
The second phone call received was from a different client’s son. He called to inform me that his father had passed away. After reviewing his father’s brokerage account, I noticed his father had not designated any beneficiaries. I contacted Schwab to find out the following steps to get the assets transferred according to his will. After getting a long list of items that needed to take place, one of which included probate, the assets would finally be distributed according to his will.
While both clients will eventually have their assets distributed as they would like, one took much longer and jumped through more hoops to get there than the other.
Questions to consider:
As you think about your estate plan, consider the following questions as you review your beneficiaries.
Do you need to review your beneficiaries to ensure they are up to date?
If so, consider whether your beneficiary designations accurately reflect your overall estate wishes. Be cognizant of different factors that may affect your heirs’ outcomes (e.g., illiquidity, lack of marketability, taxable vs. non-taxable accounts, differing investments, etc.).
Are your named beneficiaries different from what your will or trust dictates should happen?
If so, consider whether your account will transfer in the way you desire. Remember that beneficiaries take precedence over a trust or will.
If you are charitably inclined, do you need to review the investments you intend to leave to charity?
If so, consider assets that are better suited for charitable giving, such as assets that do not receive a step-up in basis (e.g., non-qualified annuities) and/or assets that are taxed as ordinary income (e.g., pre-tax qualified accounts).
Do you need to review the planned proportions of qualified and non-qualified accounts being left to your heirs?
If so, consider the tax implications of non-qualified accounts (which generally receive a step-up in basis) and qualified accounts (which are fully taxed as ordinary income, with the exception of Roth accounts) on your heirs. Be cognizant of how you divide these assets, as some heirs may be left with unequal after-tax amounts.
Do you have your “estate” listed as the beneficiary?
If so, remember that assets left to your estate will be subject to probate. Consider updating your beneficiary if this does not accurately reflect your wishes.
Do any of your accounts have a trust listed as the beneficiary?
If so, consider reviewing the trust provisions to ensure the trust is still up to date and relevant to your situation/wishes. If the account is an annuity, consider any potential challenges and limitations (e.g., potential loss of preferential tax treatment, potential forced liquidation over the 5-Year Rule, etc.) that may affect your situation.
Are you concerned about an estate tax liability?
If so, consider ways you might remove assets from your estate (or freeze them). Review your existing beneficiaries and determine whether you can mitigate any potential estate tax issues.
It is wise to review all financial accounts on an annual basis to ensure the beneficiaries are updated. That way, when the time comes, you can rest assured that your financial assets will transition to your spouse or your children smoothly. Over the next few months, we will reach out to you about your listed beneficiaries. If they are up to date, great! If we need to make some changes, we can help you get those changes made.
In the end, we want to ensure that your legacy plan will work as you want it to. We appreciate all of you as clients, and it is a pleasure and an honor to serve as your financial advisors. Please do not hesitate to contact us if you have any questions about the beneficiaries on your accounts.