In the past, I have discussed the importance of everyone, single or married, gay or straight, to have either their Will or Revocable Trust properly drafted and executed. The reason for this, of course, is so that you can decide how your property is distributed upon your death and the state doesn’t decide for you through the rules of intestacy.
Today, I want to tell you that for certain of your assets, this might not be enough There are certain assets that pass outside of probate, meaning their disposition is not governed by your will or your trust. Although this list is not complete, the most common assets are as follows:
- Section 401(k) plans
- IRAs including both traditional and Roth IRAs
- Other Retirement Plans
- Annuities with a pay on death feature
- Life Insurance Policies.
This is not a complete list, and you can see that there are some common features in the above items. In each of these, the “owner” does not necessarily own the underlying asset directly. Instead, the asset is held by a third party, for example an IRA custodian or a 401(k) plan sponsor for the benefit of the owner. These assets are not “probate” assets and are not disposed of by your Will or Trust.
Instead, they are distributed pursuant to the Beneficiary Designation. If you have a life insurance policy, and an IRA and a 401(k), you need to properly complete the Beneficiary Designation form for each and every one of them to make sure that those assets are properly distributed upon your death. The individual beneficiary designation controls what happens to each of these assets, and not your will. Also note that if you are married, there are restrictions as to who you may designate on your 401(k) only.
The reason that it is so important to have a properly executed beneficiary designation is that because if these assets pass outside of probate, they should be outside the claims of your creditors. If done properly, your heirs can generally inherit your retirement plans and life insurance policies without having to first pay that creditors of your estate (but you need to check with an attorney in your state to be sure).
A few more items you should know:
- You do not have list an individual on your Beneficiary Designation. You can list multiple people, or even a trust. The more money there is, the better idea a trust is.
- You can (and should) designate alternate Beneficiaries, in case the person you listed first is no longer living
- If you do not properly designate a beneficiary, then the asset will be distributed to the “default” beneficiary. Who this is is generally based on the contract with the company holding the asset (life insurance company, IRA custodian, etc.). The default beneficiary is often your estate (which then subjects your assets to creditors), or sometimes your surviving spouse.
A well crafted estate plan includes not only properly drafted and executed wills, trusts, and advanced directives, but also properly drafted beneficiary designations. If you have these type of assets, it is important that you discuss with your estate planning attorney the best way to complete the beneficiary designation forms, so that they are disposed of as part of your overall estate plan.