Why are Beneficiary Designations Important?

Dale Immekus |

These designations tell the state who gets your assets when you die. If you do not set up the designations up prior to your death the state will put your estate, whether it is large, small or in between, through the probate process.  This will be untimely, costly and occurs during a time of grief.

The following fee schedule will help clarify what I mean by costly regarding probate in California. The first $100,000 of an estate’s value is charged 4%, the second $100,000 of an estate’s value is charged 3% and the amount of an estate valued between $200,000 and $1,000,000 will be charged 2%.  Which means the first $1,000,000 in value of an estate that goes through the probate will have fees of $23,000.

You can easily avoid this if you title property and financial accounts, etc. properly to ensure that you decide who and what happens to your estate when you pass on. Of course, wills and living trusts will do this as well. Whether you need or already have a trust in place, many of your financial accounts can be protected from probate with proper beneficiary designations.

Let us start with retirement accounts, traditional IRA’s, ROTH’s, or group plans. In the state of California, your spouse is your primary beneficiary. He or she may waive that right in circumstances such as a second marriage or another particular family dynamic where that may make sense. The spouse would have do so in writing and have it notarized. Next you will list contingent beneficiaries. This would be the people or organization i.e. a family trust which is next in line if you and your spouse were to pass at the same time.

There are also a couple ways to plan the succession of your beneficiaries. For instance, you may state your beneficiary to be per stirpes. This states that if your beneficiary were to predecease you, then the assets would be passed on to that beneficiary’s next of kin in equal portion. The other option would be pro rata. This states that if the beneficiary predeceased you, the other listed beneficiaries would receive that share of the assets equally.

Let me explain further with this example. You list your three children as your beneficiaries each to receive one third of the account assets, and state it to be pro rata. If one of your children predeceases you, the other two children would then each receive half of the account assets. Now if you were to state the beneficiaries as per stirpes in this same situation, the two surviving children would still receive one third of the account assets and the children of the deceased child would receive one third of the account assets. This may be the route you wish to take in multi-generational families.

Here is a look at some of the more common non-retirement accounts. An individual account doesn’t require a beneficiary but you would be astute to set one up. The way to do this is by setting the account up with a TOD (transfer on death) or POD (payable on death). This strategy is sometimes referred to as a poor mans will or trust. This will avoid the probate process and your assets will go the people you wish.

Joint accounts with rights of survivorship. These accounts automatically go to the surviving person on the title. If two people hold an account with this designation and one passes, the other continues to own the account assets. Again, in the scenario in which two owners of the account pass at the same, then probate could come into play. To avoid, you simply employ the TOD or POD strategy referred to above.

This is just a brief review of the importance of beneficiary designations. There are many other considerations such as; real property, tangibles, jewelry, precious art, etc. These are outside of my area of expertise and you should consult attorneys, real estate and tax professionals. We should all utilize a team of professionals to help protect our families. Until we talk again, be well!