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Beneficiary Designation And Estate Planning

Beneficiary Designation And Estate Planning

A beneficiary designation is the act of naming the person who will inherit an asset in the event of the account owner’s passing. Some common examples include life insurance policies and retirement accounts. When the account owner passes away, their assets are then transferred to the beneficiary that they designated. It’s also possible to designate your estate as the beneficiary. Instead of transferring the asset to a person, the asset is transferred to the estate. Then, the asset is distributed according to the provisions in your Trust or Will.
It’s worth noting that the SECURE act was passed in December 2019 under the Trump Administration. It created new rules regarding required withdrawal amounts from inherited retirement accounts. It should be noted that the term ‘designated beneficiary’ is newly defined as a living person who doesn’t fall into one of the five categories below:
• Surviving spouse
• Child under the age of 18
• Individual with a disability
• Individual who is chronically ill
• Individual within 10 years of age of the deceased

As a result of the SECURE act, any person who falls into one of the above five categories is an eligible designated beneficiary. The main thing to note about eligible designated beneficiaries is that they have added benefits relative to designated beneficiaries, such as greater flexibility in withdrawing funds from their inherited assets.

There are different types of beneficiary designations, and the number of types increased with the recent SECURE act.

• Eligible Designated Beneficiary (EDB): EDBs fall into one of five categories as defined by the 2019 SECURE Act. These beneficiaries have certain advantages over other beneficiary types.
• Designated Beneficiary (DB): A DB is any living person who was named as a beneficiary, but does not fall into one of the five EDB categories.
• Not Designated Beneficiary (NDB): A non-living beneficiary is considered non designated. This can be charities, Estates, and Trusts.
• Primary Beneficiary: The named beneficiary is first in line to receive benefits, and is thus the primary beneficiary.
• Contingent Beneficiary: A Will may outline a contingent person who may receive benefits in the case that the primary beneficiary is deceased, or cannot or will not accept the assets.
• Secondary Beneficiary: This term is used interchangeably with the term contingent beneficiary.
An important thing to note here is that a named beneficiary isn’t always a living person. Per the definition of an NDB (not designated beneficiary), you can arrange to have your assets transferred to your estate. In this case, the Will will include instructions for who will inherit which assets, how much, and so on.
In general, a designated beneficiary will take precedence over a Will. This is because the entity that manages the account, such as a bank or life insurance company, will transfer the asset to the beneficiary who was named for that specific account. Sometimes, this won’t line up with instructions that were left in a Will. That’s why it’s so important to make sure that your Will and beneficiary designation won’t cause any conflict. You’ll want to ensure that the provisions in Will are coordinated with the named beneficiaries of those asset-holding accounts or policies. If not, the instructions in your Will may not be executed according to plan.
For those wanting to consolidate and avoid confusion, it’s possible to name your Estate as the beneficiary of your assets. Your Will would then name the specific individuals that these assets should be distributed to, in what proportion, and any other applicable provisions.

Why Set Up a Designated Beneficiary?

Have you made a beneficiary designation on your retirement accounts, savings accounts, and life insurance policy? Not doing so could be a mistake. When someone doesn’t set up a designated beneficiary, your estate automatically becomes the beneficiary. This could be subject to a long, expensive, and burdensome probate process. When designating your beneficiary, be sure to name a contingent beneficiary in case the primary beneficiary is predeceased. It’s also helpful to be as specific as you can. Designate your beneficiaries by name (instead of “my kids”), and be sure to specify how that particular asset will be divided and distributed.
To designate a beneficiary, you’ll need to follow the instructions provided by the company holding the asset. At times, it will be an easy process, such as simply filling out a web form provided online. Most often, the company will ask you to name a beneficiary when you first open the account. Just be sure to have the full legal name and contact information of your desired beneficiary or beneficiaries.

Keep in mind that designated beneficiaries become active the moment you pass away, and can inadvertently override any provisions about asset inheritance in your Will. It’s helpful to use online tools that will make it easier for you to review and update your estate planning and beneficiary designation documentation.

Beneficiary designation very much sounds like an estate planning term. Although it’s closely related, in this case it’s slightly different. Designating a beneficiary refers to the process of naming an individual who will receive an asset upon your passing. This is done for each individual asset, such as a life insurance policy, through the company that holds the asset. This means that you’ll need to repeat the process with the different entities that hold your assets. Estate planning, however, does play a big role. That’s because the beneficiary designation of an asset overrides your Will by default, if it does not match with the provisions of your estate plan. This is yet another reason why you should make a habit out of reviewing and updating your estate plan regularly.

Furthermore, designated beneficiary is a person who inherits an asset such as the balance of an individual retirement account (IRA) or life insurance policy after the death of the asset’s owner. The Setting Every Community Up for Retirement Enhancement (SECURE) Act has narrowed the rules for designated beneficiaries when it comes to required withdrawals from inherited retirement accounts. Under the SECURE Act, a designated beneficiary is someone named as a beneficiary on a retirement account and who does not fall into one of five categories of individuals classified as an eligible designated beneficiary. The designated beneficiary must be a living person. While estates, most trusts and charities can inherit retirement assets, they are considered to be a non designated beneficiary for the purposes of determining required withdrawals.

A designated beneficiary inherits the balance of an account, an annuity or a life insurance policy when the account owner passes away. Needless to say, anyone with a life insurance policy or other assets should review the documents regularly and make any changes required by new circumstances, such as marriage, birth, death, or divorce. Multiple beneficiaries can be named. Assets can be divided among more than one primary beneficiary. There also can be more than one secondary beneficiary. The primary beneficiary or beneficiaries are the first in line to receive the asset. The secondary or contingent beneficiary is next in line if the primary beneficiary dies before the owner of the asset, cannot be located or refuses to accept the asset.

Designated beneficiaries may be revocable or irrevocable. If revocable, the owner of the asset can make changes. An irrevocable beneficiary has certain guaranteed rights that cannot be denied or amended.
Designated beneficiaries of inherited retirement accounts are subject to the 10-year rule. This means the remaining balance held by the inherited account must be withdrawn within 10 years following the account holder’s death. There are no required minimum distributions (RMDs) for any given year, and recipients may choose the frequency and timing of withdrawals. However, the account must be fully depleted by Dec. 31 of the tenth year following the account holder’s death.

This 10-year rule limits the time in which a beneficiary can benefit from tax-deferred growth. It ensures the retirement account’s assets are withdrawn and therefore taxed within 10 years of the owner’s death. Prior to the SECURE Act, retirement account holders were able to utilize an estate planning strategy referred to as the stretch IRA. The stretch IRA allowed the account to be passed down (potentially) for generations, as distributions were based on the life expectancy of the person taking withdrawals. However, the 10-year rule does allow flexibility in when the distributions are taken. Because there is no required minimum distribution for any one year, a designated beneficiary can take withdrawals when it best suits their lifestyle and tax planning needs. For example, if Sue inherits a retirement account in 2020 and is subsequently laid off in 2021, it may benefit her to take a larger portion of the money out of the account in 2021 when she is in a lower tax bracket.

How to Collect

The designated beneficiary must make a claim to receive assets left to them as another person’s designated beneficiary. The claim form will be supplied by the company that manages the asset. The form should be returned with a copy of the account holder’s death certificate. This is available from the county or state in which the person lived.

Does Beneficiary Designation Override A Will?

You might be wondering, “Does a beneficiary supersede a will?” The answer is yes, and that’s why you want to understand the difference between a will vs. beneficiary. It’s important to be very careful when dealing with these two documents. When you sign off on your Will, you might feel relaxed with the belief that your estate plan is complete. Typically, there’s peace of mind that comes with knowing that your estate will be distributed according to plan.

However, don’t be too quick to relax. Typically, a beneficiary designation overrides a Will. For example, let’s say that you wrote in your will that you want everything to be left to your spouse. You have a retirement savings account, for which you designated your two children as your beneficiaries. At the time of your passing, the retirement savings account designation would supersede anything written in your Will. As a result, the money in the IRA would be transferred equally amongst your two children, instead of your spouse.

When an individual passes away, the instructions in a Will only distribute assets included in their probate estate. Assets with beneficiary designations get excluded from the estate by default. To avoid any conflict, it’s critical to make sure that the language of your Will correlates with each of your beneficiary designations. It helps to perform a regular review and update your Will or beneficiary designation documents as needed.

Can an Executor Override a Beneficiary?

An executor has a legal duty to carry out any wishes and instructions included in a Will. However, many people don’t realize that their assets won’t all be automatically controlled by their Will upon their passing. As mentioned earlier, there are certain asset types that are passed by beneficiary designation, overriding the Will. Therefore, an executor cannot override a beneficiary designation, unless specifically ordered to do so by the court. However, be careful not to confuse this with a beneficiary of a Will. The Will also name beneficiaries who are to receive assets. An executor can override the wishes of these beneficiaries due to their legal duty. However, the beneficiary of a Will is very different than an individual named in a beneficiary designation of an asset held by a financial company.

Do I Need a Will If I Have Beneficiaries?

Our firm helps an individuals to set up a basic estate plan at a minimum. This includes a Will, as well as a Trust when appropriate. You’ll likely have at least one designated beneficiary, but this does not cover all your bases.

Here are some quick reminders on the differences between beneficiary designations vs. will. Designated beneficiaries are typically only required for assets such as life insurance, annuities, and retirement savings accounts (IRAs, 401Ks, etc.) A Will encompasses all of your assets, including any real estate property, family heirlooms, checking accounts, and any sentimental possessions. A Will is also so much more than just language on asset distribution. It can also include your last wishes, as well as any important instructions you wish to leave to your loved ones.

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It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506
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