Major Life Changes Require an Update to Will, Beneficiary
By: Amos Goodall
Periodically updating your will or other estate plans is important, but don’t forget to update who will receive your retirement plans – such as Independent Retirement Accounts, 401 (k)s and life insurance policies upon your death.
Every year you should review your entire estate plan and the review should include beneficiary designations to make sure they aren’t outdated.
Under Pennsylvania life insurance guidelines, taxes are not immediately affected by the beneficiary designation. For creditor prosecution purposes and family succession, it is important to identify who will receive your life insurance.
It is important to name a beneficiary. Do not assume your retirement plan will be distributed according to your will. If you don’t name a beneficiary, the distribution of benefits will go according to law or your particular retirement plan.
While some may leave it to the retirement plan holders estate, this could have negative tax consequences, both for income and inheritance taxes. The only way to control where the money goes is to name a beneficiary, as a properly written beneficiary designation for these accounts trumps your will and the law of intestate succession.
You may want to designate a trust as your beneficiary. If your estate is more than the current estate tax exclusion ($2 million for 2007 and 2008) and a large portion of it consists of retirement plans, it may make some sense to mandate that the plans be payable to a trust rather than to the surviving spouse. The trust must be properly drafted to avoid income tax consequences.
If you want your money to go into a trust for your children, be sure to designate the trust as a beneficiary. If you simply name your children, the money will go directly to them. In Pennsylvania, this may mean an expensive court proceeding (such as a formal guardianship for your children), and it also may mean that your children have access to the funds when they turn 18, a result many parents wish to regulate.
There are specific IRS guidelines for trusts, and it is important to have the professional assistance of a local lawyer.
In this regard, be suspicious of out-of-town trust seminar salespeople, whether organized by lawyers or other financial advisers. A local lawyer could be your first stop in estate planning. Your own family lawyer is the best source of information, because that person knows you and your wishes best. Even if this person does not specialize in estate planning, he or she can refer you to a lawyer who is experienced.
Remember, the best financial consultant or tax adviser may not have experience in planning or declining competency and may not have specialized knowledge of Pennsylvania tax laws.
Wills sometimes stipulate that any inheritance taxes due on direct transfers such as retirement accounts (and, for that matter, joint and “transfer on death” accounts) are to be paid by the estate.
This is perfectly acceptable, if that is your wish. However, if you are planning to provide for one heir through direct transfer assets and others through your will, it may not be fair to have the will recipients pay the tax in retirement recipients’ gifts.
If you have major life changes, be sure to keep your retirement plan updated. If you get married or have children, you may want to change your beneficiary. Even if you don’t have big changes, you should review your beneficiary designation periodically.