In the movie Vanila Sky, Tom Cruise’s character is struggling with the meaning of life. In a moment of clarity, he says, “nothing is bigger than the little things.”
In the exciting world of financial planning the “little things” can make a substantial impact on your loved ones. One of the areas where we often see this is beneficiary designations.
People mean well, but putting the Estate of Jane Doe can problematic. When an estate is listed as a beneficiary, the assets must go through the probate system. Similarly, not listing a beneficiary on an account will ensure the asset goes through the probate system as well.
Probate is not necessarily a bad thing; however, it adds time, money and complexity to the process. Some states are more expensive and time consuming than others. Some states have a state death tax that is layered on top of probate fees as well.
It is not uncommon for the probate process to take one year to 18 months in many states. This is time where your loved ones will not have access to the inheritance you planned for them. As you might imagine, the longer the process draws out, the higher legal fees may potentially be.
Bottom line: Ensure that you have updated beneficiary designations on all bank, investment, and insurance related accounts.
Bank accounts should have a payable on death designation. Non-retirement investment accounts will have a transfer on death designation. Retirement and insurance accounts will just have beneficiary designations. Review these beneficiary designations whenever the name of the institution changes or you have a life event (job change, death of a loved one, etc…).
If you are in a state with a death tax (there are 12 plus D.C.) or an inheritance tax (six states), you want to know the rules within your state. Maryland is the only state with both an inheritance tax and an estate tax.
There is no guarantee that beneficiary designations are the answer to all your estate planning questions. In many instances, additional advanced planning tactics are needed to minimize or eliminate taxes and fees. All situations are unique.
However, a little extra work on the front end can save your loved one’s time and money on the back end.
–Nic
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
