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Kevin O'Flaherty

In this article, we discuss how to avoid beneficiary designation problems by making sure your various investment accounts and estate planning align. We will answer the following questions:

  • Does a will take precedence over beneficiary designations on my investment accounts?
  • Can beneficiary designation affect estate taxes?
  • Can an investment account be pulled automatically into a trust or will upon death?
  • What’s the difference between per stirpes and per capita distribution?
  • Can I just name my trust as the beneficiary of all my accounts?

Many types of retirement and risk management accounts such as life insurance, 401(k), IRAs, and annuities require or strongly suggest that you name a primary and secondary beneficiary. This will designate who receives the assets from the account upon your death. Choosing a beneficiary is usually very straightforward, and often the individual or company managing the account will suggest choosing a spouse or children for older individuals. But your estate planning requires you to choose beneficiaries as well, and if you’re not careful your family may end up spending extra time and money resolving a beneficiary issue that could have been easily fixed before your death.

Does A Will Take Precedence Over Beneficiary Designations On My Investment Accounts?

It’s a common misconception that a will is the be-all and end-all of documents that determine what happens to your assets after death. A will is merely a roadmap for the disposition of assets in your probate estate, it tells the executor of your estate what to do with assets that go through probate. All of your assets like your 401(k), IRA, etc that pass-through (are exempt) from probate will go directly to the designated beneficiaries, regardless of what your will says. If your true intention is for your children to receive certain retirement accounts upon your death, but your spouse is still listed as the primary beneficiary, then outside of your spouse disclaiming his or her interest in the asset there’s little that can be done to keep the assets from going to your spouse. This would ultimately lead to unintended tax consequences, especially if your children want the assets right away.

Can Beneficiary Designation Affect Estate Taxes?

Yes. There are a few items to be aware of when considering how beneficiary designation can affect estate taxes.

  • Cash Gifts. Correctly utilizing cash gifts can help an estate mitigate their estate tax bill but on the flip side if not enough money flows into the estate because the designated beneficiaries on certain accounts do not line up with the estate plan it can wreak havoc on the estate administration process.
  • Estate Tax Liability. Making the mistake of having all your assets pass outside of your estate to a named beneficiary may leave the executor of your estate with no money to pay the estate taxes that will be due on your passing.
  • Tax Savings. If your estate planning and the designated beneficiaries for your various accounts don’t line up there may not be enough money flowing into your trust(s) in order to make your estate tax provisions work. In the long run, this may lead to your heirs paying more in taxes.

Can An Investment Account Be Automatically Pulled Into A Trust Or Will Upon Death?

Yes and no. It really depends on how you, your attorney, and your financial planner design your estate plan. Since many investment accounts already have a beneficiary designated there’s no need to make any changes or include those accounts in your will or trust.

A pour-over will is often created for those that utilize a revocable living trust. A pour-over will has many benefits that you can read about here; one of them being it allows you to direct that any assets titled solely in your name be transferred to your trust after your death. However, these assets will go through the normal probate process, unlike those specifically named in your trust or any assets with a designated beneficiary.

What’s The Difference Between Per Stirpes And Per Capita Distribution?

Something that most don’t want to think about but still need to plan for is the chance that their designated beneficiary predeceases them. If a contingent beneficiary isn’t listed on an account and the primary beneficiary dies then the account will follow the default contract and/or the state law upon the account owner’s death. The contract will usually stipulate per stirpes distribution or per capita distribution. Under per capita distribution, the shares of any beneficiary that predeceases you will be equally shared amongst the remaining beneficiaries. Under per stirpes distribution, the shares of the predeceased beneficiary pass on to his or her children in equal parts. For example, if you had two children and one of them predeceased you then half of your assets would go to the living child and the other half would go to the children of the predeceased child upon your death.

Can I Just Name My Trust As the Beneficiary Of All My Accounts?

Not all accounts are created equal. Before naming a trust the beneficiary of certain accounts like a qualified IRA you should first check with your attorney or financial advisor. Trusts that receive funds from certain types of accounts will need to contain special provisions in order to avoid potential tax issues. 

For more information on estate planning in Iowa give us a call at 563-503-6910 and speak with one of our experienced estate planning and probate attorneys.

Disclaimer: The information provided on this blog is intended for general informational purposes only and should not be construed as legal advice on any subject matter. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship. Each individual's legal needs are unique, and these materials may not be applicable to your legal situation. Always seek the advice of a competent attorney with any questions you may have regarding a legal issue. Do not disregard professional legal advice or delay in seeking it because of something you have read on this blog.


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