Ep. 26 - The Importance of Naming A Beneficiary

GSLAW-Ep 26 The Importance of Naming A Beneficiary-Transcript

[: 00:00:00

[00:00:25] Ledly Jennings: Welcome back to The Good Steward Law and Wealth. Podcast. Glad to have everyone here today. And today we are going to talk about the importance of beneficiary designations in your estate plan. Um, and I'll use some real life examples that have been coming up lately in my practice to kind of. Show you how this actually plays out in, in the real world.

[: 00:00:46

[00:01:14] And this can be anything like a bank account, checking account, savings account, uh, CDs, money market account, but also, uh, and more commonly it's your IRAs, your 401k, any kind of investment account. And life insurance is really important to have also. So basically it is a beneficiary designation is when you name a beneficiary on your account, whatever type of account that may be, and you have several options of who and what you can name as a beneficiary.

[: 00:01:45

[00:02:15] Now, when you do that, when you name your estate, that means you either want it to go via your will, whatever your will says for those accounts. Or you just want it to go what the state law says, um, like your heirs at law. So if you name your estate, then you are in probate and we follow what the probate court says happens to your assets.

[: 00:02:35

[00:02:51] And you can do that. And there are provisions put in, um, for how things go. Um, normally that is also the probate process, but I'll give you an example [00:03:00] here where they name no one and it, it just didn't go through probate and went through another unique method that I think everyone should be aware of, but.

[: 00:03:09

[00:03:31] Aspect of not having your beneficiaries listed properly. And the example I use is, this just happened to us. Um, a husband, well, at the time, he was a single man, started working, had a 401k set up the account. He didn't have a spouse, didn't have kids, no one like that. So he put his mom as the beneficiary on his 401k.

[: 00:03:52

[00:04:16] But that's not what happened. Now, in some instances that may be okay, you know, maybe the mom and. Spouse get along and they agree and mom gives the account, but that is not always the case and we. See things happen, you know when money's involved and things don't go as you intend. So the first thing you need to make sure you do with your beneficiary designations is update 'em.

[: 00:04:37

[00:05:01] Now, one negative to this is when you have an IRA or 401k and you name no one I. And I, I talked about this in a previous podcast about how you leave IRAs or 4 0 1 Ks to people under the New Secure Act. So you can go listen to one of our previous episodes where you go really in depth on this. But generally, if you name a beneficiary, say your son, or even a trust as the beneficiary to your IRA.

[: 00:05:27

[00:05:43] They can stretch it out over 10 years. But if you do not name a beneficiary, whoever the law says that account goes to, has to take it out within five years instead of 10. So it can have a pretty big negative income tax consequence if you do not name a [00:06:00] beneficiary. Um, another example that I've seen, and it goes to show you the, um, how a wheel is really not a valuable document and you should never rely on a wheel in your estate plan.

[: 00:06:12

[00:06:39] It was an ira. They did not put a beneficiary well. The reason he didn't do that is 'cause he said, well, I have a will and I provided in my will that I want all my financial accounts to go to my daughter. He specifically wanted it to go to his daughter 'cause he did not talk to his son. They did not get along.

[: 00:06:54

[00:07:15] That contract said if you do not name a beneficiary. We will leave it to your descendants per stirpes. That means they're not even looking at the wheel, they just look at who your descendants are and leave it to them. That's based on a private contract. And a private contract overrides a wheel, so now all of a sudden this man passed away.

[: 00:07:34

[00:07:52] This headache, saves your kids' headache, avoids probate, goes to who you want it to go to. Um, so the first one we mentioned [00:08:00] is make sure you update your beneficiaries. The second one is make sure you name someone, don't leave it blank. The third one is to look out for is when you name minors. So, um, let's just say the example.

[: 00:08:13

[00:08:30] So some people list their kids as beneficiary, say at the time when they got the policy. Their kid's three years old. They list that three-year-old kid as the beneficiary and something happens to mom and dad. The kid is set to inherit that life insurance policy. Now, as you would imagine, they don't hand a three-year-old a life insurance policy of $500,000.

[: 00:08:52

[00:09:20] Um, I know it wouldn't have if I would've got that much money at 18. So there's danger in just simply listing a minor as a beneficiary because it goes to them at a young age. So the alternative to that and why I always talk about how important revocable trusts are, is create a trust and leave the life insurance policy to the trust.

[: 00:09:42

[00:10:02] Um, again, the first one was making sure you update it. Second one is making sure you at least name somebody. Third one is do not name a minor. And the fourth one is asset protection concerns. So let's use that same example. You have that $500,000 life insurance policy and you leave it to your kids. Then as soon as it's theirs, you know, when they're 18 or whatever age it is, at any point, you know, even if they're 25, you leave it to them, it's theirs.

[: 00:10:31

[00:10:57] So one way to protect that is in a [00:11:00] trust because if you leave it to hi, leave it to the trust for his benefit, it's protected from divorce. Another thing it's protected from is, um, I. Creditors. So say that. Same son's very responsible. He's a doctor. Well, even doctors get sued for malpractice. So anything you leave him, if it was outright just to his name alone, is open to that malpractice.

[: 00:11:20

[00:11:43] So that highlights the importance of a trust, but also making sure your beneficiary designations are proper within that trust and within that estate plan. Because if you have this big fancy trust set up and nothing goes into it, or everything goes outside of the trust, then it does [00:12:00] you no good. 'cause I always tell clients a trust is just an expensive stack of papers until you put your assets in it.

[: 00:12:06

[00:12:26] And that's an important step that a lot of clients leave out. Or I can't tell you how many times people come into me. With, um, an estate plan or trust drafted by another attorney, or one they did years ago and they never updated it. And then I have to tell 'em, well, this trust doesn't own anything, so it's worthless.

[: 00:12:42

[00:13:11] One example with IRAs in the new Secure Act, you have to make sure it qualifies as a see-through trust in order to inherit an IRA. So that's just something to look out for. You don't have to know what all that means or the magic words that need to make it a see through trust. But you need to make sure your attorney is thinking about that and talking about that with you.

[: 00:13:30

[00:13:56] Narrator: Thank you for tuning in to the Good Steward Law and Wealth podcast. [00:14:00] If you're ready to take control of your financial future, visit good steward firm.com to book a meeting. And sign up for our newsletter.