Wealth Management & Financial Planning

Wealth Management & Financial Planning

Unequal Beneficiaries

Not all beneficiaries are created equal. This does not mean you do not love them equally, rather it means they are different people with different circumstances, and these circumstances should be considered when you name beneficiaries for your assets.

Beneficiary designations on retirement accounts, Transfer on Death (TOD) designations on brokerage accounts or real estate, and Payable on Death (POD) designations on bank accounts all pass directly to the named individual or entity upon death and will not be considered a part of your probate estate. This speeds up the transfer of assets and avoids significant expenses that would need to be paid to an attorney to complete the probate process. Properly naming beneficiaries is an effective estate plan for transferring assets, but other considerations should be made to ensure your plan creates your desired outcome.

Do you want to leave the same amount to each of your children? Do each of your children have similar incomes? Do any of your children have interest in your home, land, or other property with significant value? Do any of your children have addiction issues or poor money habits? Do you have any children who are currently minors? Do any of your children have special needs? Do you have a church or charity named as a beneficiary? Do you have investment accounts that are taxed differently when money is distributed?

In a hypothetical situation, let’s say Jane Smith has two children and a church that she has named as beneficiaries. She would like each child to receive equal amounts, and she would like her church to receive $50,000. She has a traditional IRA with $250,000, a Roth IRA with $200,000, and a home worth $300,000. One of her children is a doctor and has an income that puts her in the 37% marginal tax bracket; her other child is a teacher, and her income puts her into the 12% marginal tax bracket. Both children are happily married, good with personal finance, and do not have any intentions of owning Jane’s home. In order to meet Jane’s desired outcome, she should consider doing the following with her beneficiary designations:

  • Make her church a 20% beneficiary of her traditional IRA – this removes a portion of the taxable inheritance from the children and leaves $50,000 tax-free to her church.
  • Make each child a 40% beneficiary on the traditional IRA – this leaves $100,000 to each child before taxes; after taxes, the doctor will have $63,000, and the teacher will have $88,000.
  • Make the doctor a 62.5% beneficiary of the Roth IRA – this will give the doctor $125,000 from the Roth and will make up for the amount lost in taxes from the traditional IRA.
  • Add a TOD Deed on the home naming the girls as 50% beneficiaries (most states allow TOD Deeds; if you live in a state that does not, then a trust would be the best option to avoid probate).

Jane’s situation is fairly simple, but it still required some modifications to make sure her desired outcomes were met. Think through your current plan; talk with a financial advisor, and ensure that your assets pass to your beneficiaries the way you intend.

Financial Enhancement Group is an SEC Registered Investment Advisor.

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