In the past, my colleagues and I have blogged about property titling and beneficiary designations and the need to review them periodically. But have you done it? Let’s look at some of the unintended consequences of ‘naming or titling’ an account beneficiary by looking at some situations that can arise by reviewing real life examples.
Case Study One
A sophisticated investor, age 65, was very conscientious about his estate planning. He set up a living trust and titled ‘all’ assets in the living trust name. He had a pour over will that brought into the living trust all assets that may have not been specifically titled in the living trust name. This is typical planning to avoid probate and to make for smooth transitions of assets to the heirs and benefactors. The investor had one son and no other family members that his estate had, or was required, to provide for. The investor had an IRA that he had named the beneficiary as his estate thinking that the funds would go into the living trust as the ‘holder’ of his estate’s assets and his son could take out the assets slowly over his lifetime if he wished.
Ok, what happens? When the estate is named as the beneficiary of a decedent who dies before 70½, there is no ‘named’ beneficiary (no individual or a ‘trust’ that qualifies) and there is, therefore, no lifetime payout option available to the beneficiary. The trust IRA assets, in this case, must be distributed at least by 12/31 at the end of the five year period, which begins January 1 the year after death. Another issue that can complicate the ‘taking over’ of the account is the fact that with the living trust and minimal assets involved in the ‘pouring over’ into the estate, there was no probate. So now we have what was intended to be a ‘legal-hassle-free’ transfer of assets being complicated because we have to prove to the custodian that there is a legal determination that the assets in fact have passed to and are controlled by the ‘executor’ or ‘trustee’. If the son was directly named as the beneficiary on the IRA, there would have been lifetime distribution available and there would have been no legal hoops to clarify ownership.
Case Study Two
A sophisticated investor, age 69, has a ‘qualifying trust’ established and is named as the beneficiary of his IRA. His three sons, age 35, 25 and 15, are the beneficiaries of the ‘qualifying trust’. At his passing, he would like each of his sons to have unlimited access to the money if they want to, but if they didn’t, he would like them to have the ability to stretch the payouts over their life expectancies.
In this case, what gets complicated is that with the trust involved there are not any opportunities to take individual life expectancy withdrawals for each of the trust beneficiaries – the three sons. The only option would be for each of them to take distributions at the oldest son’s required withdrawal rate rather than their own, lower, ‘attained age’ divisor. That means that the younger sons would have payout requirements higher than they would have otherwise had.
It might have been better to have each son named as 1/3 beneficiaries of the single IRA account because with this option, with the correct timing, the beneficiaries could break the IRA up into three accounts and then take distributions from their respective IRA beneficiary accounts over their respective life expectancies.
Case Study Three
The husband, age 40, of a young couple passes away and the wife, age 40, is named as the beneficiary of the husband’s retirement accounts. The wife can keep the retirement accounts in her deceased husband’s name or she can roll the over into her own retirement account. If she keeps the retirement account in her husband’s name, she would have to take distributions once her husband would have reached the age of 70 1/2. In this case it doesn’t make any difference because they are both the same age. So she decides to roll over her deceased husband’s retirement accounts into her own retirement account.
The problem with this is that should she now need some extra money out of the IRA (for other than a qualifying distribution), she would be subject to a 10% tax on any pre-59 ½ distributions. If she had left the money in her deceased husband’s name it would have been a distribution on account of death which is exempt from the 10% penalty.
Conclusion
Issues of property titling and beneficiary designations are so easy to clarify and rectify while we are living, but they can be a nightmare and emotionally exhausting to those that need to climb mountains and jump hurdles to merely get what you intended for them to have. Give them a break during those most stressful moments of life and optimize what you intend to leave as your legacy by keeping up to date with beneficiary designations, property titling and otherwise general estate planning however ‘large’ your estate is!
To quote 50 Cents, ‘you are never promised a tomorrow’.
David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA
All Things Financial Planning Blog 