Written by Curtis D. Rindlisbacher, Esq.
Coordinating beneficiary designations is fundamental to ensuring that your property will pass in the way you intend.
Properly planning your estate requires a good understanding of the role of beneficiary designations. This article provides some basic rules about coordinating beneficiary designations with the rest of your estate planning.
A person’s will or living trust does not control the disposition of property that passes by way of a beneficiary designation. When planning your estate it is essential to review all beneficiary designations to ensure that they accurately state the way you want the property subject to the beneficiary designation to be distributed upon your death.
Life Insurance: Every life insurance policy gives the owner the right to designate the beneficiary to whom the proceeds are to be paid upon death. If no beneficiary is named, then frequently the proceeds are paid to the estate of the insured. In some group life insurance policies the proceeds are paid to immediate family members according to the rules stated in the group life insurance contract.
Naming minor children directly as beneficiaries of a life insurance contract will require the appointment of a legal guardian before the proceeds will be paid. Consider naming a custodian under the Uniform Transfers to Minors Act for the benefit of a minor beneficiary, or naming the trustee of a trust who will hold the policy proceeds for the minor. You can use the following format to designate a custodian:
_______________________ (insert name of Custodian) as Custodian for _____________________ (insert name of minor child) until age _____ (insert age from 18 to 25) under the California Uniform Transfers to Minors Act.
Annuities: All annuity contracts also give the owner the right to designate a beneficiary. Typically, it is better to name individuals as beneficiaries rather than a trust because the settlement options available to individuals are broader. When a beneficiary is a minor, then naming the trustee of a trust or a custodian under the Uniform Transfers to Minors Act is preferable.
Pensions: The spouse of a married participant must be named as beneficiary of the pension plan, unless they give written consent to naming someone else.
IRA’s and Other Retirement Accounts: The owner of an IRA or other retirement account typically has the right to name a beneficiary. If a spouse is named as beneficiary, the spouse can roll the proceeds into their own IRA without having to pay immediate income taxes. Someone other than a spouse cannot roll the IRA proceeds over into their own IRA. However, they can establish the IRA account as an inherited IRA and delay recognition of the income from the IRA over their life expectancy. A trust may be a designated beneficiary, but special rules need to be followed to avoid having to recognize the proceeds as income before desired.
Pay-on-Death Bank Accounts / Totten Trusts: The owner of a bank account can designate a beneficiary who is to receive the money on deposit at the time of death of the owner.
Transfer-on-Death Brokerage Accounts: The owner of a brokerage account or mutual fund can designate a transfer-on-death beneficiary.