Broker Check

When Estate Planning, Consider Assets Not Included in a Will

by Howard Hook, CFP®, CPA

As published in The Princeton Packet & The Wayne Patch, October 26, 2012

I was discussing estate planning with a client recently and the conversation turned to wills. “Do your estate planning documents accurately reflect who you wish to receive your assets?” I asked him. “Of course,” my client said. “In my will I leave everything to my spouse.”

While this thinking is common, and understandable, it's also incorrect. Many people forget that many years earlier, maybe even before they were married, when acquiring life insurance, or enrolling in their 401(k) or 403(B) plan, or opening a traditional or Roth IRA account, they named beneficiaries in the event of their death. The same applies to brokerage accounts, bank accounts, and real estate if these assets are titled jointly with rights of survivorship.

When a beneficiary is named or rights of survivorship exist, assets will be passed to those individuals, despite a will that might instruct otherwise. For many, the above list may comprise 95 percent or even 100 percent of their assets. If assets are designated as mentioned above, none of them will pass according to their will. Surprised?

Over time, even wills that were originally coordinated properly may no longer accurately reflect a person's current wishes. Many times, after major life events, people change their wills. However, many of them fail to change the beneficiary designations on their retirement accounts and their life insurance policies.

Marriage, divorce, change of employment, death of a spouse, and disability are all life events that may require a change in your will and also a change in the beneficiary forms that dictate who receives them after your death. Keep in mind that the life events mentioned here do not have to be yours. A life event occurring to one of your beneficiaries may also require a change in your will as well. That is why it is important to review your will and beneficiary designation forms every time one of these life events occur.

When wills and beneficiary instructions are not in sync, assets may not be transferred in the manner intended, even if they are passed to the correct person. Here's an example involving retirement assets to be passed to a grandchild. Both your will and the beneficiary designation on your IRA account correctly named your grandchild as the beneficiary. While your will instructed your grandchild to receive their inheritance in trust until she reached a certain age, no such mention was made on the beneficiary designation form. In this case, the assets will pass directly to your grandchild and not in trust as you had wanted. It is even worse if the grandchild is a minor. Assets passing directly to minors come with additional restrictions on how the money can be invested, for what use the money can be used for, and only becomes the property of the grandchild once they turn the age of majority (which is 18 in New Jersey).

The tax code, generally speaking, requires named beneficiaries of retirement accounts to take distributions from the retirement account over their life expectancy. However, if there is no named beneficiary the account must be distributed in full within five years. For most beneficiaries this would accelerate the distributions and taxes due. In some cases, the IRS has allowed the executor of an estate to correct this after death. It's done on a case-by-case basis, and has been disallowed many more times than it has been allowed.

These are just a few of the many pitfalls of an uncoordinated estate plan. Estate plans cannot be placed in a drawer and forgotten about once completed. They need to be reviewed periodically and also whenever a life event occurs to you or one of your beneficiaries. Sometimes the plan will need to be revised. Other times the plan will be fine. In either case, note the date of the review so you can refer back to what was contemplated or done for future reference -- not only for yourself but for your loved ones as well.