Once you have chosen the people you want to receive any of your assets -- either from a will, a trust, a life insurance policy, or a retirement or bank account -- the way you designate how they will inherit should be a key consideration.
Here are five things you need to know before you name your beneficiaries:
1. Beneficiaries of a will have to wait
Any assets you bequeath to a beneficiary via a traditional will have to wait for their money or property until the probate process has been completed. In some cases, this can take many months or even years -- and if the estate is complex, the legal fees can deplete that inheritance. If you want to make it easier for your beneficiaries, consider creating a Revocable Living Trust as part of your estate plan. A trust does not go through probate; upon your death, the successor trustee distributes the assets to your beneficiaries.
2. Retirement plan and life insurance policy benefits are paid directly
The assets in a life insurance policy or retirement plan are not subject to probate and pass to your beneficiaries directly. Your beneficiaries will receive these assets after providing the account owner’s proof of death and a proof of identity for the beneficiary. Naming contingent beneficiaries is important; if the primary beneficiary predeceases you, the assets will likely go into your estate and will be subject to taxes.
3. Minor children should not inherit directly
Naming a minor child as the beneficiary of a life insurance policy or other assets is never recommended. If you fail to name a guardian, the state could take over the assets and name someone to manage those assets on the child’s behalf. This can result in additional expenses that would eat into that inheritance, and those assets may not be managed according to your wishes. Instead, the wise move is to create a trust to hold these assets for the benefit of a minor child and name a successor trustee to oversee the management and distribution of the funds in a way that complies with your wishes.
4. Give careful consideration to naming retirement plan beneficiaries
If your intention is to ensure that beneficiaries of your retirement plan do not take the cash immediately so your IRA can grow tax-deferred for the maximum amount of years, you might want to consider a trust so a trustee can manage the distribution of funds.
5. If there are multiple beneficiaries, name them
If there are multiple beneficiaries for an insurance policy or retirement plan, don’t make the mistake of just naming one person -- say, the oldest child -- and assuming they will make the proper distributions. Instead, designate a separate share for each beneficiary. If one of your beneficiaries has special needs, create a trust for their share so any inherited assets don’t disqualify them from important government benefits.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by contacting our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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