In developing a comprehensive estate plan, it is critical to understand which, if any, of your investment assets have or could have a beneficiary. If there are such investment assets, then the naming of that beneficiary must be considered in your overall estate plan.
Investment assets that commonly allow the owner to name a beneficiary are life insurance policies, annuity contracts and retirement accounts (Individual Retirement Accounts (IRA) or employer-sponsored retirement plans, such as a 401(k) plan, a 403(b) plan, a profit-sharing plan, or the federal Thrift Savings Plan). Many banks and mutual funds, or brokerage firms, allow the account owner to add a “payable on death” (POD) or “transfer on death” (TOD) designation. Such designations operate in the same manner as a beneficiary designation on a life insurance policy or an Individual Retirement Account. It is important to understand that the named beneficiary for these types of assets can claim the asset upon the owner’s death by simply submitting a claim form and death certificate to the insurance company, IRA custodian or brokerage firm. Nothing stated in the decedent-owner’s Will or Revocable Trust controls the disposition of the beneficiary-designated investment unless the estate or the revocable trust is named as the beneficiary. In other words, the beneficiary designation trumps the terms of the Will or Revocable Trust.
If the goal is that a minor child should receive the benefit of the insurance policy or the IRA, consider naming the trust for the benefit of that child established in the Will (a “testamentary” trust), or one created under the terms of the revocable trust, as the beneficiary, not the minor child. If the child is named as the beneficiary, a guardian may need to be appointed by the court to claim the death benefit on behalf of the minor child. When the child turns 18 years old, the child will take over control of any remaining assets, probably an age much younger than would be the case if made a part of the overall estate plan. The guardian will also be required to file accountings with the court during the time he or she is in control of the funds.
Although it is true that accounts with valid beneficiary designations avoid probate, the value of these assets remain included in the calculation of the deceased account owner’s exposure to federal or state estate taxes.
If you have questions concerning the best way to name a beneficiary on an investment account or life insurance policy, contact a member of Stein Sperling’s estate planning group at 301-340-2020.