Growing Families Especially Need to Stay on Top of Estate Planning

Financial planning involves more than just thinking about saving for financial goals.

It requires preparation beyond just your own life to consider who you’d like to be the beneficiaries of your assets in the event of death.

If you’re in your 20s or 30s and perhaps just starting a family, you might not be thinking of these issues yet. But the earlier, the better — making these decisions now helps establish the framework for the coming decades of saving and investing.

Estate planning can take myriad paths when establishing trusts and wills; this activity requires the guidance of legal professionals.

Before you’re ready to enlist the services of an estate planning attorney, however, you can do a few things to button up the financial household and ensure that most assets will avoid probate and will transfer as you intend to your designated beneficiaries.

This planning is an ongoing activity. The risks of not periodically designating or updating beneficiaries are too great to overlook. Old or stale beneficiaries on accounts can mean your assets pass to individuals whom you may no longer intend to receive them. In some cases, by ignoring updates and maintenance on this crucial planning component, your retirement assets could end up going through probate in the event of your death.  And probate court doesn’t work for free!

Fortunately, setting up and monitoring your beneficiary designations is relatively easy to do. Retirement accounts — i.e., 401(k), 403(b), independent retirement account, Roth IRA — give the account owner the option to designate both primary and contingent beneficiaries. Most employer 401(k) platforms allow you to make changes online, and IRA beneficiaries for accounts at brokerage firms can be changed with a simple form and signature. Beneficiaries can be individuals, a trust or even a charity, with the tax impact varying for each. For the sake of simplicity, I’ll refer to beneficiaries as “individuals.”

When designating beneficiaries, a specific percentage of the account is assigned for distribution to each corresponding individual, totaling 100%. If there’s only one primary beneficiary, that individual would receive 100% of the account value. When multiple primaries are chosen, you assign a percentage to each beneficiary with the total adding up to 100%. You could do this so that each beneficiary gets an equal piece of the account, or in varying percentages, based on your wishes.

The next step down the line from primary benefic­iaries are the contingents. Contingent beneficiary designations receive a portion of the account once all pri­mary beneficiaries are no longer able or willing to inherit the account. Like primary beneficiaries, contingents can range from one individual to multiple individuals with specific percentages assigned to each person. The sum of all contingent beneficiary percentages also must equal 100%.

Another consideration is selecting per stirpes along with your beneficiary designation.

Per stirpes is a way of distributing an estate when a beneficiary dies before you. Take the following
scenario: You have two adult children as equal primary beneficiaries to your IRA and Child A predeceases you.

1. In the event of your subsequent passing, if per stirpes was not chosen and your beneficiaries on file were not updated, Child B becomes the 100% beneficiary of the IRA account, even if Child A has grandchildren whom you would have liked Child A’s inherited share to go to.

2. If per stirpes is chosen and your beneficiaries on file were not updated, Child B still receives 50% of the account and now Child A’s heirs would receive the 50% that was designated to go to Child A.

You need to consider many issues when selecting beneficiaries. This is especially true when designating minors as beneficiaries, as they would ultimately have to take out annual withdrawals in the form of required minimum distributions. You might find it helpful to consult with an adviser to discuss the various tax impacts of your choices. Regular review of your beneficiaries on all accounts should be an integral part of your financial planning process.
This article was originally published in the December 2020 issue of BetterInvesting Magazine.

Matt Mondoux sits on the investment committee and is an adviser at Blue Chip Partners, Inc., a privately  owned, registered investment advi­sory firm based in Farmington Hills, Michigan.

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