Beneficiary Designation Assets

Certain assets transfer by operation of law, which we can call beneficiary designation assets.  The assets do not pass by will, or trust, or probate, but pass directly to the beneficiary(s) designated in the document by operation of law.

Examples of Beneficiary Designation Assets

Attorneys Colby and Thornes A beneficiary designation asset is an asset, such as an IRA, a life insurance policy, an employer sponsored retirement plan, a non-qualified annuity or even a bank account, where, upon your death, the asset will be payable directly to the beneficiary by operation of law, avoiding probate, and without the need for a will or a trust.   You fill out, sign and date a beneficiary designation form with the asset custodian identifying the beneficiaries on your death.  A beneficiary designation itself will not remove an asset from your taxable estate, but it will provide that the asset goes directly to the beneficiary as set forth in the beneficiary designation, avoiding probate, and without the need for a will or a trust.

The following are some examples of beneficiary designation assets.

  • IRA’s and Employer Sponsored Plans. An individual retirement account (IRA) or employer sponsored plan is, in essence, a savings account to which you contribute money with tax benefits that are intended to assist you in saving for your retirement. The tax benefits will depend upon the type of IRA you choose, but all IRAs and employer sponsored plans are beneficiary designation assets that have a provision that allows you to designate who receives the benefits after you die by operation of law.
  • RMD; IRA Conduit Trusts. While the law gives you the right to designate a beneficiary for your IRA, Congress has decided that it does not want those tax deferred benefits to continue indefinitely. Accordingly, the law insists upon required minimum distributions (RMD) to a non-spouse beneficiary by 12-31 of the year after the year of death of the owner/participant. The RMD distributions are required to be drawn down slowly over the expected life of the non-spouse beneficiary, but what happens when the beneficiary is a trust? Although the trust has no life expectancy, federal law permits the drawdown to be made over the life expectancy of the beneficiaries of the trust. It can qualify for “see-through” treatment, using the measuring lives of the beneficiaries for RMD, but only if the drafting is done properly. You should NOT name a trust as a beneficiary of IRAs or employer sponsored plans without the assistance of qualified attorneys directing the process to ensure that the designation is done properly and negative income tax consequences or other unintended consequences are avoided.
  • POD Accounts. A POD (“payable on death”) account is an account (savings, checking, certificate of deposit, etc.) owned by an individual, in which you designate one or more beneficiaries to receive the remaining funds in the account at your death. During your life, you are free to withdraw all or any portion of the funds, or change the beneficiary. The process, if done properly, avoids probate, passes by operation of law to your designated beneficiary on death without the need for a will or trust, and you have complete control up until the time you die.
  • Non-Qualified Annuities and Life Insurance. Non-qualified annuities and life insurance policies are also beneficiary designation assets that transfer on death by operation of law, avoid probate, and transfer without the need for a will or a trust.  Non-qualified annuities or life insurance policies are perfect vehicles to name a trust as the beneficiary without the risk of the negative income tax consequences and other associated complexities when naming a trust the beneficiary of an IRA or employer sponsored plan.  Again consultation with a competent professional can help make these choices work for you.

Whether one or more of these options make sense will depend upon your financial situation, and your overall estate planning goals. At Colby&Thornes, we can advise you on which alternatives may be helpful in your case. We can also advise you how to avoid pitfalls that can complicate matters, including causing problems among your relatives, the payment of unnecessary taxes, and any other negative ramifications.

Potential Pitfalls When Using Beneficiary Designation Assets

Like other tools, beneficiary designation accounts can fulfill many objectives of your estate plan. The documents must, of course, be properly drafted. Many of these documents will be prepared by your estate planning attorney, but there are occasions – a POD bank or brokerage account, for example – where a designation must be made on the form supplied by your bank/brokerage firm.

Beyond using the right forms, and having an estate planning firm that will advise you as to the right tools to use and prepare the proper documents, there are some additional pitfalls that can, in effect, sabotage your estate plan in different ways, many of which relate to the naming of the beneficiaries for the various assets. These mistakes include:

  • Failure to name a beneficiary.
  • Naming your estate as the beneficiary of an IRA or employer sponsored plan.
  • Failure to name a contingent beneficiary.
  • Designating a beneficiary who will become ineligible for government benefits, as a result.
  • Failure to review your entire estate plan to be certain that your beneficiary designations do not conflict with your will and your overall estate planning goals.
  • Failure to review your entire estate plan (including your beneficiary designation assets) both periodically and after any life-altering event, such as the death or birth of a child, or the incapacity of your spouse or a beneficiary.
  • Naming a trust as a beneficiary of an IRA or employer sponsored plan and not understanding the legal implications or income tax ramifications. Trusts should not be named as beneficiaries of IRAs or employer sponsored plans without the assistance of qualified attorneys directing the process.

To take advantage of all appropriate methods to achieve your estate planning goals with the lowest possible tax impact, it is essential to speak to a knowledgeable estate planning attorney.

Estate Planning Lawyer in Scottsdale, AZ

With decades of experience guiding clients through the estate planning process, the attorneys at Colby&Thornes in Scottsdale, AZ can make a huge difference in your estate plan. We understand how beneficiary designation assets can be used to simplify your estate, provide that the right assets go to the right loved ones, and avoid any unnecessary taxes and other costs. Call us to discuss your estate planning needs.

Colby & Thornes is an Arizona Professional Limited Liability Company. The members of the company are David H. Colby and Megan A. Thornes. This website is intended to provide information about our practice and the legal services we offer. It is not intended to create, nor does it create, an attorney-client relationship. The website is informational only, and should not be relied upon as a substitute for legal advice from a licensed attorney at law.

Get In Touch

Colby & Thornes PLLC
Gainey Ranch Financial Center
7373 E. Doubletree Ranch Rd. Ste. 225 Scottsdale, Arizona 85258
See map
9am to 5pm Monday - Friday