Common Myths About Wills & Estate Planning
Naming Your Estate as Beneficiary
It is almost never a good idea to name your estate as a beneficiary of life insurance policy, investment account or qualified plan (for example an IRA, 401(k), qualified annuity). There are several reasons to avoid doing this.
Naming your estate as beneficiary will cause those assets to be subject to the Probate process. Your assets that pass through Probate are subject to claims of creditors. You may think that you do not have many creditors but it may not always be that way. Perhaps you pass away with significant unpaid medical bills from a final illness or with debt incurred for something involving a loved one. In addition, many of the costs of Probate are related to the size of your estate. The higher the value of your Probate estate, the higher the costs of the administration of your estate. With a little prudence, you can avoid that type of mistake.
Naming your estate as the beneficiary of qualified plans can hasten the imposition of income taxes. If you pass those plans on to a spouse or others by naming them individually (or even through certain trusts), the beneficiary can continue to defer the income tax on those assets for a lengthy period of time. Your spouse can delay taking any withdrawals until reaching age 70 1/2 and can take only minimum required distributions thereafter for the balance of his our her lifetime. Children as beneficiaries can spread withdrawals out (and thus defer income taxes) over their life expectancy — perhaps that will be 30-60 years or more! If you name your estate, the income tax cannot be deferred longer than five years.
The best course of action for married persons is to name your spouse as beneficiary. You should also list contingent beneficiaries because in the absence of a named beneficiary, the assets will go to your estate. Avoid naming minors as beneficiaries (see my prior article on minors a beneficiaries for the reasons why). You can also name trusts as beneficiaries (especially for minors) and still retain most or all of the tax advantages above.
The estate planning team at our firm can answer additional questions about gifts to minors and many others about wills, trusts, powers of attorney and your estate. Please feel free to contact Jennifer Bamonte, Esquire or Michael E. Fiffik, Esquire.