Clients are often encouraged by advisors at financial institutions to name beneficiaries on their savings and investment accounts; however, doing so is not always beneficial for everyone.
The primary advantage of naming beneficiaries on one’s accounts is that probate is avoided. At one’s death, the asset passes to the beneficiary simply by presentation of a death certificate. While that sounds great, probate is usually not very difficult or expensive, especially if one resides in the State of New York. What most people don’t realize is that beneficiary designations supersede the terms of one’s last will and testament. For example, if your will leaves everything to your two children, but you name just one child as a beneficiary on your accounts, only that one child will inherit the assets. Moreover, if all of one’s brokerage and savings accounts list beneficiaries, there will be no money in the estate to pay expenses and any estate tax which might be due. It is also a terrible idea to name beneficiaries who are under the age of eighteen, or those who are disabled and receiving government benefits. In the case of someone under the age of eighteen, he/she can not legally inherit the asset until attaining the age of majority, and a court-appointed guardian will be required. Lastly, a married couple with an estate tax problem should not readily name beneficiaries, as there may be adverse tax consequences to doing so.
For tax purposes, it is imperative that IRA and other retirement accounts do have beneficiary designations, so that the monies can be taken out and taxed gradually, rather than all at once. There is no such tax advantage for naming beneficiaries on one’s non-retirement accounts; however, there may be some other benefits to doing so. As mentioned, the beneficiary will receive the money quickly. Additionally, if one desires to treat one family member more generously than others, a way to do that without offending anyone is to have an account which names as beneficiary the person you wish to leave more monies to. If you treat people unequally in your will, chances are good there will be ill feelings among family members.
In reviewing your estate plan, it is extremely important that you take a close look at your assets to ascertain if beneficiaries have been named, and if it is wise to keep those designations. This determination should be made in consultation with an experienced estate planning attorney. In that way, one can ensure that one’s wishes will be effectuated and that adverse tax and other consequences will be minimized.
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