Deciding who inherits your assets is a deeply personal question. It's about who you love the most, and in financial and legal terms, it involves making beneficiary designations. As financial advisor Robyn Wolcott and estate planning attorney Erin Duques discuss on their latest podcast, "Law and Financial Order," understanding beneficiaries is crucial, and there are many misconceptions.
One surprising example is the case of Carl Lagerfeld, who left a large portion of his wealth to his cat, Coupet. While you can't directly name a pet as a beneficiary, you can establish a trust to provide for their care. This highlights that beneficiary planning can be complex, even extending beyond human recipients to include charities or other entities.
A fundamental concept discussed is how assets pass at death. Many people believe their will dictates the distribution of all their assets, but this is not true. Beneficiary designations on accounts like retirement funds (IRAs, 401ks) and life insurance policies override the will. When the account holder dies, these assets pass directly to the named beneficiaries without going through probate.
Probate assets are typically those held in your name alone, without a joint owner or a designated beneficiary. Things like cars, houses (in states like Connecticut), or bank accounts without beneficiaries might go through probate, where the court decides their distribution based on the will or state law.
It's essential to name beneficiaries on your accounts. You should name at least a primary beneficiary (first in line) and ideally one or more contingent beneficiaries (next up) to create layers of protection in case primary beneficiaries pass away before you.
For more sophisticated planning, such as staggering distributions to heirs (like for a "spendthrift" child) or protecting assets for minors until they reach a certain age, naming a trust as the beneficiary is necessary. Simple beneficiary forms are limited and cannot incorporate these complex instructions. Therefore, your beneficiary designations must align with your overall estate planning documents like a trust or will.
Another critical decision is how assets are distributed if a beneficiary passes away. This involves choosing between per stirpes (by branch, meaning the deceased beneficiary's share goes to their children) or per capita (by head, meaning the share is split among the surviving named beneficiaries). It's vital to clarify this preference when setting up beneficiaries.
Practical advice includes understanding that there is no standard beneficiary form across all financial institutions, so it’s important to ask questions and get guidance. Also, revisiting and updating your beneficiary designations frequently, perhaps annually or at least every three to five years, is highly recommended, especially after life changes like marriage or having children. Many people set these up when they are young and don't revisit them as their lives evolve.
The podcast also highlights potential pitfalls, such as adding someone as a joint owner on a bank account simply to help manage finances. This action makes the asset legally theirs, subjecting it to their financial issues, bypassing your will upon your death, and potentially triggering gift tax implications. A better alternative for access is naming someone as your power of attorney on the account.
Finally, an insightful strategy mentioned is using beneficiary designations on specific accounts for charitable giving. Leaving an IRA to a charity is particularly tax-efficient, as neither you (upon death) nor the charity will be taxed on the distribution.
Beneficiary designations are powerful tools. They are crucial components of financial and estate planning that ensure your assets go where you intend, outside of the probate process for many account types. Understanding these designations, reviewing them regularly, and ensuring they align with your broader estate plan is key. Seeking guidance from qualified professionals like a financial adviser or estate planning attorney can provide valuable assistance in navigating these complexities.
Listen to this and other episodes of Law and Financial Order on Law and Financial Order - Podcast - Apple Podcasts
*Erin Duques is not affiliated with Warner Wealth or LPL Financial.
**Robyn Wolcott, Warner Wealth and LPL Financial do not provide legal advice or services. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.