Titling accounts incorrectly could be a disaster (Part 2)Written by Nolan Baker Mark Clair | | firstname.lastname@example.org
Last week, we wrote an article on how incorrectly titling accounts such as 401(k)s, IRAs, life insurance and annuities can be an absolute disaster. If this is not done correctly children and grandchildren can be unintentionally disinherited and IRA and other retirement accounts can turn into tax time bombs. This week, we wanted to point out two big mistakes we see people making to help you and your family avoid these traps.
Last week “Tom” came into our office because of the death of his wife. When this happens we sit down and go over all of the accounts and make sure everything that needs to be changed as a result of the death is taken care of. We look at the beneficiary of each account, who the owner now is, if there is a spouse and who the survivors are. It is called our BOSS review. After checking the beneficiary designation on an account, we noticed that there was no secondary beneficiary named. If this was never updated and Tom died, the account would go to his estate rather than his son as he intended. This could be a taxable event and could add additional probate costs and time delays. And before you know it, his son could lose as much as 50 percent of the account in the form of taxes, fees and expenses. Even if Tom’s son wanted to avoid the loss of 50 percent by fixing the forms, it would be too late after his father passed away. You only get one shot at getting the forms correct, in most cases there is no second chance.
Grandparents and Adult Children pay attention to default beneficiary designations. As an attorney, I (Mark) will throw some legalese at you. When considering your beneficiary designation it is important to understand the difference between the terms per stirpes and per capita. Per stirpes is “through the roots” or “by representation” which means that each distributee takes in a representative capacity and stands in place of a deceased ancestor, down the bloodline. This form of distribution is distinguished from per capita which is “an equal division of the property to be divided among the beneficiaries, each receiving the same share as each of the others, without reference to the immediate course of descent from the ancestor.” In plain English think of “by the head.” The money is paid out to the surviving named beneficiary only. To sum it up, if you have grandchildren it may be the perfect time to get a professional review of your forms so you aren’t confused on how your money would be paid out at death.
Here is an example that happened in my (Mark’s) family that may make this easier to understand. My grandfather David had an annuity account that he named his three children, Doug, Don and Lois, as equal beneficiaries. David died at the age of 94 and the proceeds were to be divided up. The problem was that Don had died prior to his father David. That left only Doug and Lois (two heads instead of three). By law the proceeds were to go to the surviving beneficiaries Doug and Lois and they were not obligated to share the money with Don’s wife or son (David’s grandson also named David). I have a feeling that my grandfather’s intention was to have his son Don’s share go down the bloodline. The problem was he never got around to changing it.
This is an example of the wording being per capita instead of per stirpes. By the way, my dad and aunt did the right thing and gave a third to Uncle Don’s wife to use for the benefit of David. Although this worked out in Mark’s family this simple mistake could have caused major family problems and could have been a tax nightmare.
Be sure to have complete information on beneficiary forms. There are five key elements of a good beneficiary designation. 1. Full name. 2. Date of Birth. 3. Social security number. 4. Physical address of the beneficiary. 5. Exact percentage each beneficiary is to receive. As we discussed earlier it is also important to indicate whether you want the proceeds of the account to go down the bloodline or merely be divided among the surviving heads.
All of this can be very confusing so here are a couple of ways you can take action to avoid a disaster. First, on our Web site at www.retirementguysradio.com we have made available a free copy of My Beneficiary Form Checklist. This is a great form that takes you through 15 important steps regarding your beneficiary designations from the basic idea of having a physical copy of your form and where do you keep it, to the legalese we talked about in this article. Second, The Retirement Guys are holding a series of upcoming workshops where we actually spend some time during the meeting going over this form with you. Third, send us an e-mail with specific questions to email@example.com. Make sure that you review each account to avert disaster and take steps to make sure your exact wishes are carried out.
Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC. The Retirement Guys are not an affiliate of NEXT Financial Group. Their office is located at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. NEXT Financial Group, Inc. nor its Representatives provide tax advice, always consult with an Accountant.