Q: My partner and I have been together for 22 years.
We have wills and have named each other as beneficiaries of our life-insurance policies. But I’m confused whether the will or the policy will dictate where the money goes if something were to happen. Can you help?
A: First, I’m so happy to hear that you two have been together for 22 years. Here’s hoping for another 22 and more. And yes, many people find this to be a confusing topic. Let’s discuss how beneficiaries work with insurance policies, as well as with retirement plans.
Naming beneficiaries of insurance policies and retirement plans
One estate-planning concern that is shared by people from all walks of life is who gets what when you pass on. While some individuals logically may assume that a last will and testament is the only official forum to express such decisions, that is not always the case. Often, an equally important issue is determining who to name as beneficiary on life-insurance policies, employer-sponsored retirement plan accounts and IRAs, since beneficiaries of these assets are paid directly as named, regardless of what may be spelled out in a will.
Let’s review some general transfer guidelines for these types of assets.
Life insurance
No matter who is designated as the beneficiary of a life-insurance policy, the individual(s) 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 same-sex couples, a surviving partner will be the most logical beneficiary. However, if it is determined that a partner would not have the ability to manage a large sum of money, a trust may be a prudent beneficiary choice. The trustee (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.
Another important consideration is naming contingent or secondary beneficiaries. This means that if the primary beneficiary is no longer living, the insurance proceeds would go to another named 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 state law. Many LGBT individuals without children may choose to consider a charity as a contingent beneficiary.
Employer-sponsored retirement plans and Individual Retirement Accounts (IRAs)
The law requires that a spouse be the primary beneficiary of a 401(k) or a profit-sharing account unless he/she waives that right in writing. Since same-sex partners are not considered legally married spouses under federal law, this requirement does not exist.
Single people can name whomever they choose as beneficiaries of retirement accounts, and non-spouse beneficiaries, including same-sex partners, are now eligible for a tax-free transfer to an IRA.
Also, the IRS has issued regulations that dramatically simplify the way certain distributions affect IRA owners and their beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.
Naming children may not be best
Because insurance companies, pension plans and retirement accounts may not pay death benefits to minors, when children are factored into the estate-planning mix, a guardian, trust or trustee should be named beneficiary to ensure competent management of the proceeds. 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 would keep the proceeds out of probate.
To summarize, when naming beneficiaries, consider: • 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. • 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.
Keep your plan up to date
After completing estate plans and wills, it is important to review and adjust beneficiary designations as needed to ensure your estate plan accurately reflects your intentions. Remember, outdated beneficiary designations (e.g., ex-partners) could misdirect the intended flow of an entire estate plan.
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.
Jeremy Gussick is a financial advisor with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning needs of the LGBT community and was recently named a 2012 FIVE STAR Wealth Manager by Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including the Delaware Valley Legacy Fund, the Greater Philadelphia Professional Network and the Independence Business Alliance. OutMoney appears monthly. If you have a question for Jeremy, contact him at [email protected]. LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
*As reported by Financial Planning magazine, 1996-2012, based on total revenues. **Award details can be found at www.fivestarprofessional.com
This article was prepared with the assistance of S&P Capital IQ Financial Communications and is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor, or me, if you have any questions.
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