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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Beneficiary Designations – Are Yours Current?

With the current federal estate tax exemption at almost $5.5 million, most people aren't thinking much about estate planning. After all, there's no way your estate would owe the tax if you happen to die, so no problems, right?

Well in a word – Wrong!

In fact, there's an important estate planning move you should probably make as soon as you finish reading this, and that is to check the beneficiary designations for all your bank and investment accounts, tax-favored retirement accounts, company benefit plans, life insurance policies, annuities and 529 college accounts.

If you haven't yet turned in the forms to designate beneficiaries, you need to do it now! And if your forms are out of date, get them changed.

Need a couple horror stories to kick you in gear? Well how about these?

You were previously married, and you intended (as most do) for your ex to get nothing more after your recent property settlement. How would it make you feel to know that if you died, the ex would be allowed to gobble up your pension benefits and the proceeds from your company-provided life insurance coverage?

Pretty lousy I'd say, especially if your intention was for your children from an earlier marriage to receive the money.

Unfortunately, that's just what happened in a case that went all the way to the U.S. Supreme Court. In that case, dear old Dad failed to change the beneficiary designations for his pension benefits and life insurance after the divorce, so his ex remained the named beneficiary

SCOTUS ruled that the beneficiary designations trumped state law. So she got the money, and the kids got stuck with the bills for the legal fight!

In another battle, an ex-wife collected $400,000 from her ex-husband's company savings plan when he died, even though she had seven years before specifically waived all interest in the plan under the divorce agreement.

Believing the divorce agreement was the final authority, the man failed to turn in the form to officially change the plan beneficiary from his ex to his child. SCOTUS held that the badly outdated beneficiary designation overrode the divorce agreement.

Again, the ex got the cash and the child got the shaft!

Divorce is not the only situation where failing to submit or update beneficiary designation forms can cause big problems for intended heirs; it just tends to be the most obvious.

For example, it's basically the same issue if you become less than thrilled with the life choices of one of your adult children because he's decided to, say, be a professional tiddlywinks player. Or you might want to leave more of your life insurance to an adult child who just had quadruplets.

The issue is basically this - when things change, your beneficiary designations may need to change, too.

Most importantly, do not depend on your will to override outdated beneficiary designations. As a general rule, whoever is named on the most recent beneficiary form, no matter how old or outdated, will get the money automatically if you die, and nothing in your will changes that.

Now, what about accounts that don't typically have beneficiary designations, like bank and investment accounts?

Well, if you are married and your accounts are set up with your spouse as a joint owner with right of survivorship, the survivor of the two of you will automatically become sole owner after the first dies.

If that is what you intend, fantastic! Still, you may want to name some secondary beneficiaries to cover the possibility that your spouse dies before you do.

So What to Do? Here are estate planning moves to make NOW!

*For Bank and brokerage firm accounts, prepare and submit a transfer on death (TOD) or payable on death (POD) form to name or change your beneficiary or beneficiaries.

*On tax-favored retirement accounts, employer-sponsored benefit plans, life insurance policies, annuities, and 529 college accounts, complete and submit beneficiary designation forms to name or change beneficiaries.

Beyond making sure your money goes where you want, another advantage of designating individual beneficiaries is it avoids probate and protects the privacy of your beneficiaries.

In contrast, if your estate is your beneficiary, your will, if you have one (or state law if you don't), directs the money to your heirs, and the estate must go through the time-consuming and often expensive court-supervised probate process before the assets get where they should.

In some cases, having your beneficiary designations up-to-date can lesson or eliminate the need for a will. In many states, including Arkansas, it is even possible to transfer real estate automatically using a beneficiary deed.

The key words here – UP TO DATE. Check your designations at least once a year or whenever significant life events occur. It usually only takes a few minutes to conduct a checkup and make needed changes, but the results can be dramatic.

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