How to Make Sure Your Beneficiary Designations Intersect with the Rest of Your Estate Plan

Coordinating your Last Will and Testament (or Revocable Trust) with your beneficiary designations is an important aspect of estate planning. If you have an IRA, 401k, 403b, or other retirement account, chances are that you’ve completed a standard beneficiary form. Simply put, it designates who should receive the account upon your death. Most of these forms are straightforward with simple options, and if everything goes according to plan, they will work for many people. That being said, sometimes not everything goes according to plan or your estate plan may have some qualifications that a standard form cannot accommodate. We can plan for these scenarios by completing a custom beneficiary designation attachment.

Benefits of a Custom Beneficiary Attachment vs. a Standard Beneficiary Form

A typical standard beneficiary form allows for one or more primary beneficiaries and one or more contingent beneficiaries. The standard form will also generally allow you to elect one of two options for what happens if a beneficiary predeceases you – that beneficiary’s share is either distributed among the surviving named beneficiaries or directed to the deceased beneficiary’s descendants.

Let’s consider a common scenario where your spouse is named as the primary beneficiary and then your adult children (with a “per stirpes” election) are named as the contingent beneficiaries. If your spouse predeceases you, the IRA is distributed to inherited IRAs for your children and each child can decide what to do with the inherited IRA. This example likely played out just as it would under your Will/Trust.

Now consider what would happen if under the same scenario a child predeceased you. The per stirpes election would direct that child’s share to his/her children and this too is likely the same result as your Will/Trust, at least insomuch as it directs the property to your grandchildren. However, what if your grandchildren are still young and your estate plan built in the protection of a trust until age 35 to protect their inheritance? In this scenario the standard beneficiary designation bypasses the terms of your Will/Trust and your grandchild receives the property outright at the age of 18, overriding the very thoughtful and intentional planning you put into place.

What if a beneficiary has special needs and any inheritance should be directed to a Special Needs Trust? What if the contingencies for deceased beneficiaries are different for each beneficiary? What if there is a difference between how to handle a deceased beneficiary’s share compared to a beneficiary disclaiming (choosing not to accept the inheritance)? What if instead of a percentage you want to use a specific dollar amount for a beneficiary or class of beneficiaries and then direct the balance of the account to other beneficiaries?

How to Navigate This Complex Intersection

So how do you solve the problems described above when a standard beneficiary form is not enough? Well, that’s the classic lawyer answer of “It depends.” We will consider the use of a Revocable Trust and using it for beneficiary designation purposes. It could make sense to divide a retirement account into multiple accounts for particular beneficiaries (particularly charities) or convert an IRA into a Roth for the benefit of higher income tax beneficiaries. We could use a custom beneficiary attachment to account for your contingencies and most likely, we would use a combination of all of the above and other sophisticated estate planning tools to achieve your estate planning goals.

Our office is invested in a comprehensive approach to prepare your Will/Trust as well as completing your beneficiary designations and other necessary paperwork  (or work with you and/or your advisors) to make sure that all of your assets are successfully incorporated into your estate plan.

Photo: Cropped version of Peter Gorman’s Intersections of Pittsburgh poster.

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