Beneficiary

Article Dean Dorton

Most assets of which we are the sole owner pass at death according to the terms of our will and beneficiary designations of retirement plans and life insurance.

In a real example from a dispute that went all the way to the U.S. Supreme Court, a daughter had an “unpleasant” outcome when her father passed way. Her father’s ex-wife was awarded $400,000 from his retirement plan even though she had waived any interest in the plan in the divorce and property settlement agreement.

What happened? The father failed to update his beneficiary designation form to name his daughter as beneficiary. When he died seven years after the divorce, his former wife was still named as the beneficiary upon his death. The employer’s plan document stated that beneficiaries could only be changed by submitting the required form. The Court held that the administrator of an ERISA-covered benefit plan need only look to the governing plan documents to determine the proper plan beneficiary.

This case reminds us of some very important points:

  • Do not rely on documents such as a divorce decree, property settlement agreement, or a will to name beneficiaries of life insurance policies, retirement plans, 529 college savings plans, and annuities. Determine the currently named beneficiary for all such assets and, if you want the designation to be changed, obtain the proper forms to change your beneficiary designation and complete and properly submit the forms. Keep copies of the completed forms with your will and other testamentary documents.
  • Divorce is not the only situation where failing to update your beneficiaries can cause problems for intended heirs. You may want certain benefits to go to specific children. Their financial or medical situations may have changed. Remind yourself to do an annual “check-up” to review beneficiaries. This should include primary and contingent beneficiaries. It is important to include a secondary beneficiary in case the primary beneficiary predeceases you.
Please contact Missy DeArk at mdeark@deandortonstg.wpenginepowered.com if you have questions about this important topic.

Article Dean Dorton

Two of the most common ways to remove assets from your taxable estate is to make outright gifts or make gifts in trust.

An outright gift simply means giving assets directly to your children, grandchildren or other selected beneficiaries. This approach is very easy and does not require the creation of new entities, such as trusts or partnerships. But there are concessions for such simplicity. Once you give assets to your beneficiaries, you no longer have any control over those assets. The beneficiaries can do with them what they wish. There is no asset protection for your beneficiaries, so the assets would be available to the creditors of your beneficiaries or disgruntled spouses. Any assets gifted in this manner would also be included in the taxable estates of your beneficiaries.

A gift in trust means giving assets to a trust, rather than to a person. A trust is a separate legal entity which is governed by the terms of a trust agreement. This additional entity adds some complexity and cost to your gifting plan. The trust agreement can be drafted in a variety of ways to achieve your specific goals. You could structure the trust to enhance your control over the distribution of assets from the trust by naming yourself or a trusted designee as the trustee of the trust. You could structure the trust to potentially enhance your financial security, if your spouse is a named beneficiary of the trust. You could structure the trust to preserve the flexibility to make unequal distributions to different beneficiaries, either now or in the future, which could allow you to account for special considerations such as sickness, disability, or financially irresponsible beneficiaries. A trust also provides asset protection for your beneficiaries, as the assets of the trust are beyond the reach of your beneficiaries’ creditors or spouses.

You could structure the trust to terminate after the deaths of your immediate beneficiaries, or structure it to keep the assets out of the taxable estates of your beneficiaries in perpetuity or at least skipping tax on one or more generations.

You could structure the trust so you are treated as the “owner” of the trust for income tax purposes, called a grantor trust. In this circumstance, you, rather than the trust or beneficiaries, would report the trust income on your income tax return. This feature provides an additional “tax-free gift” in the amount of income tax that you pay on the trust income. An irrevocable trust can structured to be treated as a grantor trust if is contains certain provisions, such as, providing income for the benefit of the grantor or the grantor’s spouse, or allowing the grantor the power to substitute assets. Grantor trusts also allow you the flexibility to exchange high basis assets that are in your personal name for low basis assets held in the trust where they will get a step up in basis at your death.

Whether to make outright gifts or gifts in trust depends on a variety of factors which are as unique as you and your beneficiaries. We’d be happy to help you define your goals and find a solution that fits you – contact your Dean Dorton advisor if we may be of assistance.