Q: I want to talk to my lawyer about estate planning. Does estate planning include retirement and life insurance benefits, or only items like my home and stocks and bonds?
A: Estate planning involves a review of all of your assets that you own to include: real estate, life insurance, retirement and pension, stocks and bonds, mutual funds, cash accounts, vehicles, businesses, household items and collections.
One of the areas that is not thought about frequently by clients is life insurance and retirement plan benefits, which make up a large portion of people’s estates. In fact, for younger people, the largest assets in their estate are life insurance and a home. As clients become older, life insurance, retirement plans, a home and securities all become more significant.
Retirement benefits are not viewed by clients as being important at death, because they are designed to take care of one while living. However, retirement benefits do affect your spouse and sometimes the next generation. Individual retirement accounts are passed to spouses and children.
It is critical with retirement and life insurance plans that the beneficiaries listed are correct and up to date. Typically, a spouse is named as a primary beneficiary, with children named as alternate beneficiaries. However, if you have young children, it would be wise to name a spouse as a first beneficiary and a trustee as the beneficiary for the benefit of the children. As your children become older, the beneficiary designations are spouse as primary beneficiary and children as secondary. The trustee designation is removed.
Some retirement plans will only pay out to a spouse if the owner is deceased, but there are other types of retirement plans that will pay to a spouse and/or to the children. An IRA will pay to a spouse and it will pay to children over a substantial period of time.
In retirement plans, a primary beneficiary and a secondary beneficiary need to be named. If not, problems arise; benefits may be paid into an estate, and the benefits may pass to the wrong person.
It is essential when you do change your beneficiaries on either a retirement plan or a life insurance plan that you keep the paperwork to prove it is done. Remember that the plan is a contract between you and a company to make payment at some time in the future. A plan is not controlled by your will, therefore beneficiary designation is important.
It is critical that you check the paperwork for your plans every few years to make sure the proper people are named and in the correct percentages for benefits. It is easy to overlook the fact that someone has died or fallen out of favor and you no longer wish to name such a person as beneficiary. It is not uncommon to see a parent, who is now deceased, as a beneficiary on a child’s life insurance plan. The child simply forgot that the parent was named on the plan.
A change in one’s marital status, the beneficiaries, or business arrangements all necessitate a review of the retirement plans and life insurance beneficiary designations.
A quick review of your policies or contracts will tell you who the beneficiaries are of the plan, what the plan value is, whether you have them up to date and if they are coordinated with the terms of your will. Check with your life insurance agent or company benefits office to determine your beneficiary designations. Once you have done it, if changes are needed they can be made, but remember that they must be coordinated with your thinking in terms of your will and overall estate planning.