Have You Overlooked Your Designated Beneficiaries?
An important, and usually overlooked aspect of estate planning, are designated beneficiary forms. More lawsuits are being filed because the decedent failed to property fill out the designated beneficiary forms.
Designated beneficiary forms are used to list the beneficiaries for IRAs, 401Ks and other qualified retirement accounts. To designate beneficiaries for bank accounts and investments, the forms are called "pay on death" or "transfer on death" forms.
The probate court system (and the related cost) can be avoided by using designated beneficiary forms or "pay on death" designations. Probate will be necessary if the forms are left blank or the "Estate" is listed
If you are married, you must take extra care in properly filling out the form. Your spouse must be the d beneficiary for 401(k) accounts or other qualified retirement accounts created under the federal statute called ERISA, unless a spousal wavier is signed. This is true, even if the qualified retirement account was created prior to the marriage.
IRA's do not have this requirement because IRA's were not created by ERISA. Nevertheless, under Arizona community property laws, a spouse is entitled to one-half of any contributions and one-half of the growth of the IRA which occurs during the marriage. Thus, if you want your children and not your spouse to receive your IRA, a spouse waiver should be filed. This applies to all residents who die in Arizona, even if the IRA was created and maintained in another state.
If you want to make a gift to a charity upon your death, the IRA or retirement account is a good idea. Since a charity does not have to pay income tax like an individual, the charity receives more of the money than a relative or friend would. Therefore, it makes sense to leave charitable gifts through the retirement account and leave other assets, not subject to income tax, to relatives or friends.
If you have minor children who you want to receive the account if you and your spouse die, then a trust should be created and the trust should be listed as the contingent beneficiary. The terms of the trust agreement would then name an adult as trustee to take care of it for a child until a certain age.
If a minor is listed as a beneficiary and will receive more than $10,000, then a conservatorship will have to be established. Under a conservatorship, the types of investments are limited and the account then must be paid out when the child is 18 years old. This would frustrate the purpose of most retirement accounts, so creating a trust for the children and listing the trust is a must.
If a beneficiary is an adult who receives governmental benefits, then a trust should also be listed as the designated beneficiary. If the account pays out to the adult, he could lose his governmental benefits. However, if a special needs trust is created and named instead, then the adult can receive money from the account and still have governmental benefits.
"Pay on death" designation forms are very similar to designated beneficiary forms for retirement accounts. The considerations listed above apply.
Life insurance also has beneficiary forms for the proceeds. The primary beneficiary can be any adult or several adults. However, if proceeds are going to be left to the children of an adult beneficiary, if the adult beneficiary is not living, then a trust should be listed as the beneficiary.
If you have concerns about creditors reaching your assets, then you might not want to list your revocable trust as a beneficiary for life insurance or retirement accounts. Instead, you might list a distinct trust for your beneficiaries.