Estate planning and retirement assets: What you need to know

Q: My partner and I were recently married and we have a young son. We think we should be looking to update our wills and beneficiary information on our retirement accounts, just in case. Any thoughts on where to start? 

A: First, congratulations on your recent marriage! And yes, I’d agree now may be a good time to revisit any planning you may have done to make sure it reflects your current desires and new family structure. Here are a few thoughts to help you begin: 

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 may logically assume that a last will and testament is the one official forum to express such decisions, that’s not always the case. Often, an equally important issue is who to name as beneficiary on life-insurance policies, pension-plan accounts and IRAs, since these assets are passed on independent of what may be spelled out in a will. 

Life insurance

No matter who is designated, the beneficiaries will generally 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 typically do not go through probate.

For many married individuals, a spouse will be the most logical beneficiary. A trust may be a better beneficiary choice, however, if a surviving spouse would not have the knowledge, time or comfort level to manage the insurance proceeds. A properly designed and executed life-insurance trust can provide considerable advantages to you, your loved ones and your estate. But trusts can be complex instruments, so be sure to consult with an estate-planning professional with experience in setting up life-insurance trusts to help ensure your peace of mind.

Also, remember to name contingent or secondary beneficiaries. This means that if the primary beneficiary has died, the insurance proceeds will go to the individual or trust named as secondary beneficiary. If there are no surviving beneficiaries, then the beneficiary is generally the insured’s estate, which means the death benefits will be 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 intestacy laws.

Many people also consider naming charities as either partial primary beneficiaries and/or contingent beneficiaries as well, to help support organizations or causes that are important to you and your family. 

Pension plans and Individual Retirement Accounts (IRAs)

Generally, the law requires that the spouse be the primary beneficiary of a 401(k) or a profit-sharing account unless he/she waives that right in writing. A waiver may make sense in a second marriage — if a new spouse is already financially secure or if children from a first marriage are more likely to need the money. 

Single people can name whomever they choose. And non-spouse designated beneficiaries of qualified retirement plans may be eligible for a “trustee-to-trustee” transfer to an inherited IRA, thus preserving the ability to stretch distributions over their life expectancies. Charitable beneficiaries are also an option with retirement accounts as well. Consult your tax advisor on how these rule changes may affect your situation. 

Naming minor 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 and/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.

IRS rules provide that plans may allow non-spousal beneficiaries to stretch 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/or tax advisor can also offer guidance as to whether this action may be appropriate for you.

Keep your plan up to date 

As you formalize or update your estate plan and will, it is important to review all beneficiary designations so that your plan accurately reflects your current intentions. Remember that beneficiary designations could misdirect the intended flow of an estate unless they are kept up to date.

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 R. Gussick is a CERTIFIED FINANCIAL PLANNER™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBT community and was recently named a 2016 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including DVLF and Independence Business Alliance, the Philadelphia region’s LGBT chamber of commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at [email protected] 

This article was prepared with the assistance of DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. 

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*As reported by Financial Planning magazine, June 1996-2016, based on total revenues.

**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2016 Five Star Wealth Managers.