What should you look for when choosing a beneficiary?
The question today is what should you look for in choosing a beneficiary?
First of all, we need to determine what a beneficiary is. A beneficiary is a person who will receive assets or something of value after you pass away. That could be tangible assets, real estate, personal property or intangible assets such as stock, certificates, copyrights, patents, etc.
The first thing I do when I think about picking beneficiaries is to imagine yourself getting ready for Christmas. Who are you going to buy presents for? That’s a good indication of who you might want to have as your beneficiaries because Christmas is a once a year event and people want to make other people happy by giving them gifts. Requesting assets is a once-in-a-lifetime situation so it’s another time where you can look at it like Christmas and making people happy with the gifts.
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In this article I am going to cover some common types of beneficiaries and what you should look for when selecting one.
The first is called the primary beneficiary. so you identified something that this particular person’s gonna get and if they’re not around or don’t want that item then there’s a contingent beneficiary and alternate so to speak.
In most estate plans there’s also what we call residual beneficiaries and it’s kind of a catch-all in case some of the other assets escaped without being designated and the residual beneficiaries are determined by each individual state’s intestate succession rules.
Individual beneficiaries can be individuals, groups like the Lions Rotary Club for example. They could be non-profits like ARF (Animal Rescue Foundation) or cancer societies. They can also be religious organizations.
One factor to consider is who is financially dependent on you? Do you have young children? If so, you need to consider their dependence and you might want to supplement a gift to them to maintain their lifestyle should you pass away by adding in term life insurance to help get cash for their future.
Another factor is are you married or partnered? That would be another thing to look at. What are your spouse’s needs for finances? Consider whether you have children, grandchildren, nieces or nephews who might benefit from your assets. Look at what promises you made in the past. Did you agree to pay your parents medical bills? Did you agree to pay your nieces education costs?
Another thing to point out is if your beneficiary is under the age of 18 in California they cannot directly receive more than $5,000. If anyone under the age of 18 receives over $5,000 they just can’t hold it; they have to have either a parent or guardian and a guardian of the estate.
If it’s in a court proceeding another thing you can do for minors is give them a 529 plan which is contributions to an education fund. Another item that can be considered for minors is a uniform gift to minors act form but keep in mind when they turn 18 they can take the money out and spend it, buy cars, entertainment, etc and waste the rest.
You can keep money in your trust for a minor until they become a certain age. I frequently see a third of the assets at age 25, a third at age 30 and a third at age 35 to let the beneficiary get used to handling large sums of money.
Another option for a minor is a method called a blocked account. We get into blocked accounts normally in probate proceedings. Employer sponsored pension plans have some unique characteristics. If your employer has a 401k or a 403b pension plan you cannot give that beneficiary statement to anyone other than your spouse without the spouse signing that they agree to that. It’s just a requirement under the ERISA Law and that requirement does not apply if it’s an IRA or a Roth IRA.
Other beneficiary characteristics people think that everything goes by will or all the assets will pass by trust. That is not the case. Certain assets like life insurance annuities, IRA accounts, Roth IRAs you have a contract with the vendor and that contract is usually called the beneficiary statement. Your will and trust has no impact on your contract with the vendor. One thing you can do if you want those assets to go into your trust is you could name the trust as a beneficiary, but there are some pitfalls in naming your trust as a beneficiary. If you have pension plans and that is an individual recipient or individuals can roll over the funds into a rollover IRA and claim tax benefits like not having to pay tax on the distribution all at once. If you designate your trust as the beneficiary that right disappears. You can make gifts through a will, but if it’s over $166,250 now that has to be probated before it’s distributed.
You can make gifts through trusts and for minor children or people that are not able to handle large sums of money, such as they’re disabled or chemically dependent, you might consider setting up a special needs trust to protect government benefits or to allow for time for the person to become not so much of a spendthrift let’s say a child at age 25 when you distribute the gift.
I hope this article has been helpful and given you some things to think about before choosing your beneficiary.
If you have any questions about choosing a beneficiary, or want to talk to someone in the office feel free to contact us today!
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