A person or couple creating a new estate plan should carefully consider changing beneficiary designations on retirement accounts and life insurance policies, to make sure that the goals of the estate plan are being served by these beneficiary designations. Priorities in changing beneficiary designations frequently include the following:
- Don’t leave money directly to a minor child or very young adult. If your will or living trust includes testamentary trust clauses for your children until the reach a certain age, name the first testamentary trustee as the beneficiary. Then name your children as the contingent beneficiaries after the trust. This will help ensure that, if your children have reached a certain age and the testamentary trust is no longer needed, your children will still receive the intended benefits. You can obtain appropriate language for naming a testamentary trust as a beneficiary from your attorney, life insurance provider, or financial institution.
- Name your living trust as the final contingent beneficiary. By doing so, you should avoid probate of the proceeds if all of your named beneficiaries have predeceased you.
- Consider deferred taxation on retirement benefits. IRAs, 401(k)s, and similar retirement benefit plans are subject to complicated rules regarding minimum distributions. Consult with a CPA or CFP about the tax implications of your beneficiary designations.
- Be careful about exposing life insurance proceeds to creditors’ claims. In most cases, life insurance proceeds are not subject to the claims of the deceased person’s creditors. Life insurance benefits can thus provide crucial support for minor children even if the parent’s estate was otherwise insolvent. Clients should thus be careful about naming their trust or estate as a beneficiary of life insurance proceeds, which could unnecessarily expose those proceeds to creditors’ claims.