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Most of us know that having a will is important. The gay community knows better than any other group in this country that dying without letting the world know who should get your assets can lead to disastrous — and sometimes bitter — results.
But what most people don’t know is that a will isn’t the final word on who gets many of the things we own. That’s right, your will — and you have a will, right? — may say that your partner gets the house, the life insurance proceeds and your retirement account money, but your will isn’t where lawyers will look to see who actually gets those items.
Those items go to the beneficiary listed in the paperwork you filled out when you signed the contract for your home, life insurance policy and 401(k) plan. And in the high-stakes world of lawyers, a contract trumps a will.
One of my clients just about jumped out of her seat when she discovered that her IRA — and its many thousands of dollars — would go to her cheating ex-husband if she died. So you can see, making sure your wishes are followed after you die entails more than getting a will. Here are some tips on handling the issues of beneficiaries:
Know when beneficiaries are required. You must name beneficiaries for estate assets that will bypass probate and go directly to heirs. These types of assets include retirement accounts (both employer and individual), annuities and life and disability insurance policies.
Decide who gets what. Once you have your list of assets that require beneficiaries, you face the crucial task of doling out your worldly goods. True, it’s often difficult to decide which family or friend gets what. But if you fail to name a beneficiary, your state of residence will do the job for you, and that official choice might not necessarily be what you would want.
The state could name your estate as your beneficiary, increasing both the estate’s tax bill and administrative costs. Or the state might presume that an heir named in your will should receive a particular asset that requires a beneficiary. Whatever the state decides could be challenged, but you can help prevent time-consuming inheritance battles by naming beneficiaries.
Don’t name your estate as a beneficiary. If you select your estate as beneficiary, your assets will end up going through probate, a costly and time-consuming process. Plus, the death benefit would count as part of your estate, meaning it could increase any estate taxes. And even though the probate process itself is lengthy, the asset actually could be distributed sooner than you would have intended. For example, it could be ordered paid as a lump sum rather than as periodic payments.
Don’t name minor children as beneficiaries. Among all the steps that gays and lesbians may have to take to legally protect their children, don’t neglect to ensure their well-being in your absence. By law, children can’t control the assets, so the court will name a guardian, either a person or a financial institution, for the assets. Instead, set up a trust or designate a guardian yourself if you want to leave your pension to your kids. Also be aware that children can take control of assets when they turn 18, something you may not want, so consider a contingency plan.
Minor children, others with capacity problems such as mental or physical illness, or just compromised judgment would be better served to receive an income stream held in trust.
Think about tax ramifications. The tax implications don’t necessarily stop when you leave property, so tax planning beyond your death is necessary.
For example, the rules on how a person who inherits an IRA must withdraw the money from the account differ dramatically depending on whether the person was the named beneficiary or received the IRA through a will.
Name contingent beneficiaries. This will help protect your estate and heirs if your primary beneficiary dies before you and you don’t get around to changing your designation. Forgetting to change a beneficiary when the person predeceases you can have an impact on your estate and its heirs. Some experts recommend naming two contingent beneficiaries to be on the safe side.
Keep everything up-to-date. I know, I know, loves lasts forever. But let’s face it, relationships sometimes end. Make sure your assets are going to the new love of your life and not the old one.
Make copies. When you fill out beneficiary paperwork, be sure to make a copy for your records. Financial planners recommend that you get a signed receipt for each beneficiary form since firms sometimes lose the originals.
Taking the time to make sure your assets go to the right people may not be much fun, but neither is leaving your partner both bereft and broke.
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