After putting it off for years, you finally got around to making a will. Now your estate plan is complete–or is it? Many people put a great deal of thought and effort into creating their estate plans. They take the time to write, review, and revise their wills, as well they should. Unfortunately, however, many people fail to adequately address those assets that are not governed by the terms of their will.
A common misconception is that a will provides for the disposition of all of your assets at your death. But if you have a 401(k) plan, an IRA, insurance policies, or other assets with named beneficiaries, or if you have pay-on-death bank accounts, that money will be distributed directly to the named beneficiaries, notwithstanding what your will says. Consequently, if your will says that you want your children to receive your life insurance proceeds, but your ex-spouse is still on the beneficiary form, your ex-spouse gets the money.
Paying attention to assets that are not governed by your will (i.e., non-probate assets) is important because, for many Americans, the two most valuable assets they own are their homes and their retirement plans, and, of those two, the retirement plan is frequently several times more valuable than the home. It is not at all uncommon for a retiring factory worker to live in a home worth $200,000 and have $1million in his 401(k) plan. So, adequately addressing these assets has got to be part of your overall estate plan.
It is not only important to keep your beneficiary designation up to date, but you should take care to name a contingent beneficiary (in case your primary beneficiary predeceases you) and to provide that assets will be paid to a qualified trust, instead of an individual, where necessary.
Although the reasons are not always obvious, there are times when naming a trust as a beneficiary of your retirement plan is a critical and necessary step.
- When the beneficiary is a minor;
- When a beneficiary is a spendthrift or cannot manage money;
- When a beneficiary has creditor or marital problems; and
- When a beneficiary is receiving needs-based government assistance (Medicaid, SSI).
In these instances, a trust can provide the following benefits:
- The trust can hold and manage assets during the beneficiary’s minority;
- The trustee can use his discretion regarding distributions to the beneficiary, within the standards set by the trust;
- The trust can provide asset protection;
- The trust may be drafted as a special needs trust, and thus not an “available resource” for the purposes of government assistance; and
- The trust can be used to “stretch” the retirement plan to make payments to the beneficiary over his life expectancy and thus take full advantage of tax-deferred growth.
Lastly, you should be aware that in some instances federal law can trump your beneficiary designation. For instance, if you name your children as beneficiaries of your qualified plan, but then you remarry, under ERISA, your new spouse could be entitled to your retirement plan proceeds, notwithstanding your intentions or designations.
Despite what some websites may want you to believe, estate planning is complicated and it involves more than just writing a will. You need to understand how various types of assets are treated under state and federal laws, and how those laws interact. If you are at all uncertain, you should seek the advice of a qualified legal professional who specializes in estate planning. Good resources include the Louisiana State Bar Association and the National Academy of Elder Law Attorneys.
This article was published in the April 2017 edition of Senior Living Magazine.