by Josh Stelzer
We’ve all opened an investment account with our broker and been asked to elect a beneficiary. All too often, we make this election without thinking about the issues that can arise when an account is transferred from the account owner to their elected inheritor. Today we will take a look at three items that every account owner should be aware of when designating a beneficiary.
1. This election means more than you think…
The first issue that many account owners may not be aware of is the order of operations when an account owner passes away. Many people assume that their will or estate planning documents will dictate who will receive their assets at death. In reality, the beneficiary listed on your brokerage account almost always takes precedence over your will. It’s also virtually impossible to remove or change the “improper inheritor” post-mortem. This can only be changed if you can prove that the improper beneficiary was elected fraudulently. Needless to say, it’s very important to have your will and your beneficiary designations closely coordinated.
A second, and perhaps more serious implication of having your assets transfer to the wrong individual, is the financial impact that will result for the person you just disinherited. The whole reason you listed them in your will was to provide for their wellbeing, but with the error of your beneficiary election not matching your will, this support will not reach the intended parties. This can have a catastrophic effect on the lives of your loved ones and the estate plan that you had in place.
2. Make sure to elect contingent beneficiaries
This should be a no-brainer. The contingent beneficiary serves as a backup in the event that your primary beneficiary predeceases you, or in a tragedy dies at the same time. In the event of a husband and wife passing together, the assets would then go to your estate and pass to the new beneficiaries via the probate process.
From an estate planning perspective, electing a contingent allows the primary beneficiary to “disclaim” the inheritance. This is often done if the primary beneficiary does not wish to add the inherited assets to their overall estate, and instead elects to pass the inheritance on to the next person in line. Obviously avoiding probate is the focus here, as this can be a very costly and time intensive process for everyone involved.
3. Be very careful with your wording…
If a trust or estate is named as the beneficiary; attention to detail is the key. If naming a trust, as used in a “bypass trust” strategy, coordination between the account owner, financial planner and the estate attorney is crucial. Due to changing laws and trust document adjustments, it is very important that these advisors be on the same page at all times.
Electing the “estate” as the beneficiary also comes with several issues. The first implication is being subject to probate, which can cause a long delay in the asset transfer process. The estate election can also have a large impact on the calculation for Required Minimum Distributions (RMD’s) for your beneficiaries. Depending on the account owners’ age, these forced distributions may be accelerated simply because the estate was named as the beneficiary. This can be easily avoided by simply naming a beneficiary to receive those assets upon your passing.
As you can see, the election of a beneficiary can have several impacts on your family, estate executors and your overall estate plan. It’s very important to review your beneficiary designations to ensure that your assets will pass in accordance with your wishes. Life events such as retirement, new children, and divorce should all trigger a review of your beneficiaries. I encourage you to take five minutes today to review these designations in order to protect those you love.