Beneficiary Designation Horror Story

Regardless of your income or net worth, there’s one estate planning task you should do right now: check the beneficiary designations for your life insurance policies, bank accounts, brokerage firm accounts, and retirement accounts. You should update these forms as necessary. If you don’t, the consequences can be dire.

MarketWatch’s recent article, “Make this estate planning move right now: Check your beneficiary designations, explains how the Fifth Circuit Court of Appeals reversed the trial court by finding that a pension plan administrator didn’t abuse her discretion in determining that a deceased plan participant’s stepsons weren’t considered his “children” under the terms of the plan. As a result, the deceased participant’s siblings, not his stepsons, were entitled to inherit the plan benefits in Herring v. Campbell (5th Circuit 2012).

Halloween-1746354_640In that case, John Hunter died in 2005. He had retired from Marathon Oil, where he was a participant in the company pension plan, which let him name a primary and secondary beneficiary. Hunter designated his wife as the primary beneficiary but didn’t designate any secondary or “contingent” beneficiary. After his wife died, he didn’t update the document to add a new primary beneficiary. Under the plan’s terms, when a participant died without designating a valid beneficiary, the deceased participant’s benefits were distributed in the following order of priority: (1) surviving spouse, (2) surviving children, (3) surviving parents, (4) surviving brothers and sisters (siblings), and finally (5) participant’s estate.

After he died, the plan administrator rejected the claim that Hunter’s two stepsons would qualify as “children” who’d be entitled to all the benefits. Instead, the plan administrator distributed the benefits of more than $300,000 to Hunter’s six siblings.

The stepsons sued for the benefits, claiming that they were, in fact, Hunter’s children because, by his actions, he’d “equitably adopted” them. The evidence seemed to indicate that he probably did mean to leave his benefits to the stepsons, so the trial court concluded that the plan administrator abused her discretion by failing to consider the stepsons’ equitable adoption claim. But the plan administrator appealed to the Fifth Circuit.

The Fifth Circuit agreed with the administrator’s interpretation that the term “children,” and for purposes of the plan, it meant biological or legally adopted children as opposed to un-adopted stepchildren. The District Court’s decision was reversed, and Hunter’s pension benefits went to his six siblings.

Typically, whoever’s named on the most-recent beneficiary form will get the money automatically, if you die. This brings up another advantage of designating individual beneficiaries—it can help you avoid probate, because the money goes directly to the named beneficiaries by “operation of law.”

Doing a beneficiary checkup and making any needed changes will take just a few minutes. Don’t wait, or it could be too late, like it was for Mr. Hunter’s stepsons.

If you would like to discover more about taking the very important next step in the estate planning process, consider joining us for a free educational workshop.  You can reserve your spot by clicking here now.  Grab a seat today as space is limited.

Reference: MarketWatch (June 30, 2017) “Make this estate planning move right now: Check your beneficiary designations”



Answers to 401(k) Questions

401k eggAs you develop your financial and estate plans, you should consider integrating 401(k) accounts into an overall retirement strategy. It’s an important part of the process, says Kiplinger in its recent article, “6 Answers to Your 401(k) Questions.”

401(k) s are the largest source of funds that most individuals set aside for retirement. Here are some thoughts on questions you should consider.

How do I enroll? If your employer has a retirement plan,  such as a 401(k) or a 403b, your Human Resources department should talk about enrolling when you’re hired. If you’ve been there a while, most companies will hold a group meeting with HR and a representative from the plan sponsor. They will go through the highlights of the plan and help you to enroll. There are a couple of things to bear in mind: figure out the company match and take advantage of it; and if there’s no company match, you may want to look at a personal Roth IRA and IRA contributions, before going with your employer’s retirement plan.

Which one: Roth or Traditional IRA? Some employer retirement plans are offering Roth options, so choosing between traditional or Roth to save for retirement is important. In a traditional 401(k), you’re not getting a tax deduction for your pre-tax contributions, but instead are getting a tax deferral. You’ll eventually pay taxes on the money in these accounts funded with pre-tax dollars, when you take withdrawals in retirement. You’ll pay tax on the pre-tax contributions and all of the gains.

For a Roth, you invest post-tax dollars going into the account and won’t be taxed again. Withdrawals in retirement are tax-free for your contributions and your growth. Therefore, do you want to pay the taxes now (on a Roth) or pay taxes during retirement (with a traditional IRA)? If your plan offers a Roth 401(k), it’s wise to put your contributions there because the money will be tax-free after you retire.  It also shields your retirement assets from possible future income-tax rate increases.

How much do I contribute? Look at the current IRS contribution limits and the additional contribution limits of your specific company plan. Try to contribute up to the company match in order to max out your employer’s contributions to your retirement savings. You also should consider how much you can afford to contribute based on your monthly budget and cash flow. Once you’ve contributed up to the match, if you’re able to save more for retirement, review your Roth IRA and other tax-free options.

How should I invest? There are many factors to consider. Each person’s situation is different. Consider your age, risk tolerance, investment timeline, other available retirement assets, fees, taxes, and the amount you’re able to contribute, among other factors.

When do I change my investments? Most employer sponsored retirement plan participants never make changes to their investment choices after they enroll! Broad exposure to low-cost index funds and ETFs across multiple asset classes typically work for most investors to withstand market swings.  However, you shouldn’t disregard your account for years or decades until retirement. Your specific factors, as well as the available investments within your plan, may change with time. Major life events may also necessitate changes in your investment strategy. Get financial advice and think about making annual adjustments to rebalance your allocations, as needed.

When you save for retirement, start early, be consistent, max out your Roth options first whenever possible and don’t be afraid to ask for help.

Reference: Kiplinger (June 2017) “6 Answers to Your 401(k) Questions”


Check on Your Beneficiaries…Today!

Fortune cookie inheritanceWhen you pass away, what you leave to your loved ones is important, but so too is how you leave those assets. Making certain that you leave the right assets to the right beneficiaries, is a critical element of effective estate planning.

Forbes’ recent article, “Pass On Your Assets Wisely: How To Choose The Right Beneficiaries,” examines several common asset types and considerations to be taken when naming beneficiaries.

Life insurance. These proceeds can be paid to the beneficiaries quickly. After proof of death is established, the funds are paid. Think about heirs who may need ready access to funds after you pass. That’s usually not a minor child. However, if you do name a child, you must designate a guardian or place the proceeds in trust. Otherwise, the state may take control and assign a stranger to manage the money on your child’s behalf.

Assets in a Will. When you pass away, your will is going to be probated, and the assets can’t be distributed until the probate process is complete. Because of this, be sure the beneficiary of any property or assets specified in the will is in a position to wait. You can also create a revocable living trust to hold those assets, so a trustee can distribute assets directly to beneficiaries without waiting to go through probate.

Retirement plans. When you select the beneficiaries for retirement plans, remember that it can result in tax implications. The younger the recipient, the longer their life expectancy, and the more time they will have to withdraw funds from the plans. That means the account can continue to grow tax-deferred. You can also name a trust as the beneficiary of a retirement plan, and the assets in the trust will be protected from creditors. A retirement plan inherited outside of a trust may not enjoy this protection. In addition, if a beneficiary is young, the trustee can make distributions under conditions that you state when you create the trust.

Last, be certain the beneficiaries named in your retirement and other financial accounts are consistent with your estate plan. A beneficiary designation of your 401(k) plan supersedes anything in your will.

Reference: Forbes (May 30, 2017) “Pass On Your Assets Wisely: How To Choose The Right Beneficiaries”


Trimming Taxes for Retirees

Bigstock-Senior-couple-standing-togethe-12052331A recent article from Kiplinger, “Retirees, Cut Your Taxes With These Moves,” offers some ideas to help you limit how much you owe.

Forms. Make sure that you have the right form for 0% gains. Investors with taxable income up to $37,650 on a single return and $75,300 on a joint return, get a nifty 0% tax rate for their long-term capital gains. But while all the gains are tax-free, they still have to be reported on your tax return. If you just report your profits on your Form 1040, they’ll be taxed in your top tax bracket.  It is better to report your gains on Form 8949 and carry them over to Schedule D. This will apply the 0% rate to qualifying profits.

Standard Deduction. Use a supercharged standard deduction for taxpayers age 65 and older. Younger taxpayers get the 2016 standard deduction of $6,300 (married couples, $12,600). But at age 65, the write-off grows to $7,850 for singles and $13,850 for a couple, if one spouse is 65 or older ($15,100 if both spouses are 65 or older). If that number is greater than the total of your itemized deductions, you’ll avoid the hassle of itemizing and save money.

The “Angel of Death” Tax Break. The current tax basis of inherited assets is their value on the date of death of the previous owner. Congress says that stepping up basis to date-of-death value will save heirs more than $32 billion this year. If you sold inherited assets, don’t leave these savings on the table.

Medicare Premiums. Similar to other health insurance premiums, Medicare expenses count as a deductible medical expense.  However, they are generally deductible only to the extent that they exceed 7.5% of adjusted gross income. However, if you’re self-employed, you’re not limited by the 7.5% threshold.

IRAs. If you’re married and your spouse is still working, he or she can contribute up to $6,500 a year to an IRA that you own, if you were at least 50 last year (otherwise, the limit is $5,500.). If you have a traditional IRA, contributions are allowed up to the year you reach age 70½. With a Roth IRA, there’s no age limit. As long as your spouse has enough earned income to fund the contribution to your account, this tax shelter is still available.

Reference: Kiplinger’s (March 2017) “Retirees, Cut Your Taxes With These Moves”


Here’s What an Estate Plan Can Do for You

Wills-trusts-and-estates-coveredThe need for an estate plan applies to everyone, says Trust Advisor’s recent article, Why An Estate Plan Is Beneficial.”

With a small estate, you should be even more careful to avoid unnecessary expenses and to retain the most resources for fulfilling your personal, financial, and charitable goals. The article cites four key reasons why you should have an estate plan:

  1. Stipulating Care for Yourself. This includes a healthcare proxy, power of attorney and living will that states how you want to be cared for, if you become incapacitated.
  2. Financial Security. Your will lets you specify the way that you want your assets distributed and to whom. Without a will, state probate law will determine who receives your assets.
  3. Designating Guardians. If you have minor children, it’s critical to make written arrangements for their care. A will is the only legal way to do so in most states (e.g., California is an exception). You must designate a person that you want to be entrusted with the care of your children.
  4. Designating Beneficiaries. Your estate plan will include completing beneficiary forms for insurance policies and retirement accounts. It’s a good idea to review your designated beneficiaries after any major life event, like marriage, divorce, a death in the family or the birth or adoption of a child. Remember, you can also name a charity as a primary beneficiary or contingent beneficiary in your plan.

Reference: Trust Advisor (April 29, 2017) Why An Estate Plan Is Beneficial

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