Naming beneficiaries of insurance policies and retirement plans

Q: As I get older, I start to think more and more about what will happen to my things when I’m no longer around. How can I make sure my insurance money and retirement accounts go to the right people after I’m gone?

A: This is a great question! Many people think simply having a will is enough. But it’s not — especially when we’re talking about assets from insurance and retirement plans. Those of us in the LGBT community have to be extra careful to make sure our final wishes are well documented and up to date.

Whether you’re wealthy or earn a modest income, there is one estate-planning concern that is shared by people from all walks of life — the decision of who gets what when you’re gone. While some individuals logically assume that a will is the only official forum to express such decisions, that’s not always the case. Often, an equally important issue in estate planning is who to name as beneficiary on life-insurance policies, employer-sponsored retirement plan accounts and IRAs.

Life insurance

No matter who is designated, the beneficiaries will receive the death-benefit proceeds income-tax free. Unlike property disposed of in a will, if the beneficiary designation form is properly completed, insurance proceeds do not go through probate.

For many LGBT individuals, a partner will be the most logical beneficiary. A trust may be a prudent beneficiary choice, however, if a surviving partner would not have the ability to prudently manage a large sum of money. The trustees (often a legal entity rather than an individual) would then take charge of managing, investing and disbursing the policy proceeds for the benefit of the surviving partner.

Be sure to name contingent or secondary beneficiaries. This means that if the primary beneficiary has died, the insurance proceeds will go to an individual or trust. If there are no surviving beneficiaries, then your beneficiary is generally the “estate of the insured,” which means the death benefits end up being probated and ultimately distributed according to the instructions of the decedent’s last will and testament. If an individual dies without a valid will (intestate), then the order of legal beneficiaries to whom assets are distributed is specified by that state’s law.

Naming a charitable organization as a beneficiary can also be a good option for many of us. Your financial advisor may be able to help you find a suitable charity or charities depending on your interests.

Employer-sponsored retirement plans and IRAs

The law requires that a spouse be the primary beneficiary of a 401(k) or profit-sharing account unless he or she waives that right in writing. However, this protection does not exist for same-sex couples.

Single people can name whomever they choose as beneficiary, and non-spouse beneficiaries, including partners, are now eligible for a tax-free transfer to an Individual Retirement Account. The IRS has also issued regulations that dramatically simplify the way certain distributions affect IRA owners and beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.

Naming children may not be best

Naming children as beneficiaries may cause unforeseen problems. For example, insurance companies, pension plans and retirement accounts may not pay death benefits to minors. The benefits would likely be held until they could be made to a court-approved guardian or trustee of a children’s trust. A guardian, trust or trustee should be named beneficiary to ensure competent management of the proceeds for the children. By naming a children’s trust as a beneficiary, for example, the proceeds could be invested and managed by a competent trustee (a person or institution) you choose. A revocable living trust could also be named as a beneficiary, which keeps the proceeds out of probate.

Also keep in mind that the IRS allows non-spousal beneficiaries to annuitize retirement plan distributions over the life of the beneficiary. Check with your employer to find out if this is an option under your plan prior to naming a child as a beneficiary. A competent financial professional and tax advisor can also offer guidance as to whether this action may be appropriate for you.

Keep your plan up to date

When completing overall estate plans and wills, it is imperative to readjust all beneficiary designations so that your estate plan accurately reflects your intentions. Remember, outdated beneficiary designations (e.g., older parents or ex-partners) could misdirect the intended flow of an entire estate unless changed now.

Also, keep in mind beneficiaries are paid directly as named and not governed by the wording of wills.

As is always the case with estate planning, consult with qualified professionals concerning your particular situation in order to ensure that your beneficiary designations are in tune with your goals.

When naming beneficiaries, remember to consider … — The age of the beneficiary. Many policies and plans will not directly transfer assets to minors until a trustee or guardian is approved by a court. — The ability of the beneficiary to manage assets. Perhaps a trust set up in the person’s name would be better than a direct transfer. — Naming contingent beneficiaries. Should something happen to your primary beneficiary, the contingent beneficiary would receive your assets.

Jeremy Gussick is a financial advisor with LPL Financial, the nation’s leading independent broker-dealer.* Jeremy specializes in the financial planning needs of the LGBT community and is active the Delaware Valley Legacy Fund, the Greater Philadelphia Professional Network and the Independence Business Alliance. Out Money appears monthly. If you have a question for Jeremy, e-mail [email protected] .

This article was prepared with the assistance of McGraw-Hill Financial Communications and is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor or Jeremy Gussick if you have any questions. LPL Financial, Member FINRA/SIPC. *Based on total revenues, as reported in Financial Planning Magazine, June 1996-2010.