Author Topic: How to properly assign contingent beneficiaries to retirement accounts?  (Read 1382 times)

FLBiker

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DW and I recently had our estate planning done.  We've got revocable living trusts, pour over wills, etc.  My question is how best to handle the contingent beneficiaries of our retirement / life insurance accounts (which exist outside of our trusts).  For each of us, the primary beneficiary is the other spouse.  We have one daughter, and we'd like everything to go to her if we both die, but she's only two.  She's the secondary beneficiary of each of our trusts.  My brother is the primary trustee (for both of us) and my sister is the secondary trustee (for both of us).

Should we make our daughter the contingent beneficiary for our retirement / life insurance accounts?  Or should we make the trust the beneficiary?  Or the trustee?  I feel like the right move is to make the trust the beneficiary, but I'm not sure how much of a pain that would be (as all the online forms seem set up for people rather than trusts as beneficiaries).  And it seems like making our daughter the contingent beneficiary might accomplish the same thing.

We both trust my brother and sister completely, as well.  If DD is young when we die, we want our money to go to the family that takes her in (no strings attached).  If DD is older, we want the money to go to her.  I'm also planning to write up a simple(ish) 1-2 page document explaining our investments / investment strategy for whoever takes it on, as I've been responsible for it to this point.  And, as part of this document, I'd also ask the person who got the money to give some relatively small gifts to family members / charities.

We've both got 403Bs, 457s and life insurance.  And if there's any additional info that would be helpful, please ask.  Thanks!

mbl

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #1 on: September 21, 2017, 08:01:31 AM »
Please seek the counsel of a good estate attorney.

There are numerous ways to go.
Making a trust the beneficiary might have some drawbacks.

You can provide some direction posthumously but, it will be left up to the judgement of the trustee.

How do you think your money will  "go"  to the family that takes her in?
Who will provide oversight?

You absolutely need to see an attorney.

Looking for legal advice from forums is questionable at best.
Good luck


I'm a red panda

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #2 on: September 21, 2017, 08:38:38 AM »
Agree on seeking legal advice.
Where you live may also impact how this should be done. I know the advice we got in Iowa was different from what we were told when we lived in Texas.

FLBiker

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #3 on: September 21, 2017, 08:42:51 AM »
Thanks!

How do you think your money will  "go"  to the family that takes her in?
Who will provide oversight?

Sorry if this wasn't clear -- my brother (followed by my sister) is the trustee for both of our trusts, and the guardian for our daughter.  Thus, he'd have the money (as the trustee of our trusts).

And I'm certainly willing to talk to our attorney about this, but since I pay for her time, I'd rather collect some information first.  For example, you mention possible drawbacks to making the trust the beneficiary.  What would those be?  And what would happen if we made our daughter the beneficiary (in other words, how does a minor own a retirement account)?  I'm trying to understand the possibilities, so that I can ask the right questions with a lawyer.

Thanks again!

PepperPeter

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #4 on: September 21, 2017, 09:33:04 AM »
Trusts are taxed at a higher rate than individuals - compressed brackets.  It should take your attorney all of .3 to tell you how to name your primary and contingent beneficiaries to complement your plan.  Did they not give you a funding letter when you executed your documents?  It's pretty standard practice.

mbl

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #5 on: September 21, 2017, 09:33:41 AM »
The job of the attorney is to answer the very questions you've asked here.
It shouldn't take long and paying a good attorney for a half hour or hour of their time in this case
will pay off in peace of mind.  Some things are just the cost of doing business.

Goldielocks

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #6 on: September 21, 2017, 10:00:53 AM »
If you do nothing:

If you both die, the money will revert to your estate, and follow the directions in your will.  This is not terrible, but may end up with some estate tax or probate fees which are pretty small, overall, right now, on the average estate.   The money will be distributed to the trusts you have set up in your will, per your will directions.

If you name your daughter, and she is a minor:
If you both die, it will bypass your estate (will) document, and the state will have to set up a trust and trustee to administer it until age of majority.  Usually the trustee is someone like a lawyer for the state, who gets paid from the trust.   This option is very expensive compared to the others, and you are better off with do nothing.  (If you are already paying for a trust, with your will instructions, you do not want to pay for yet another,  more expensive trust management fee with the state's instructions only on it).

If you name the trust you have set up:
This is the one where you need to know what will happen if you name an intestate trust as a beneficiary, that has not been set up until you die.   Here (my region), the money would go to the trust named on your retirement account, as the trust set up in your will would be presumed to be set up first.  If you have a living trust (while you are alive) pre-setup, there is no question.  The money goes to the trust.
If it is not considered to be set up when the money transfers, then it bounces (as if you tried to give money to a deceased person), and it goes to your estate and your will to determine how it is handled. (like the do nothing option).    Here, this is your best option.

If you give it to your brother:
No problem here, but he can use it however he wants.  If you trust him, great, but why would you have set up a trust in your will if you felt this way?  In your will you would have just given it all to him directly and saved the trust hassle.*

*Trust hassle -- the effort and additional cost to get a lawyer to set it up in your wills, and the set up cost of the actual trust at that time, and the hassle of providing specific instructions on how you want the money invested or distributed after your pass.   Obviously there are tax and distribution control benefits that come with a trust if you are putting a large sum of money into it. 


Contingent Beneficiary:
Ask your retirement plan provider how they want the contingent beneficiaries worded.  Some have automated systems that do not provide for contingent beneficiaries in the database, but you can provide a written, witnessed letter describing your intent -- "100% to my spouse, and if he is no longer living, 100% to the trust XXX"..   

Age of majority:  As soon as your daughter gets to the age of majority, where you want the funds directly to her, change your beneficiary designations.
« Last Edit: September 21, 2017, 10:06:08 AM by Goldielocks »

FLBiker

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #7 on: September 21, 2017, 11:40:10 AM »
Excellent, all, thank you very much for your help!  TBH, we haven't executed our documents yet (plan is to do that tomorrow).  I wanted to make sure I had any final questions prepared ahead of that.

Thanks!

Goldielocks

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #8 on: September 21, 2017, 12:12:52 PM »
YMMV..

When I went to have our will set up, I wanted a trust arrangement for the kids, too.  I thought that I wanted kids covered if I died and SO remarried, then he dies suddenly.   Then the lawyer explained the added costs to write it that way now, and the fact that very little $'s would be flowing through our estate as property and bank accounts were joint, and the retirement accounts and life insurance had beneficiaries... Therefore the added cost was not worth it until we had more $$'s to worry about that the will would cover.

Instead, we opted for a basic will, without trust formations, but naming guardian for kids and items in the event of mutual death, and basic distribution decisions for single deaths.  The intent is for this will to cover us for nearly 20 years until kids are well over age of majority, divorce, or other life event -- OR we acquire a lot value outside of our retirement funds.

GizmoTX

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #9 on: September 21, 2017, 12:37:26 PM »
What 'added costs' to include a testamentary trust for minor children? This is basic stuff; no trust is created until/unless both parents die, & the language in the will simply specifies trustee(s), the amount/percentage of the trust, the intent that it be used for the support, welfare, & education of the beneficiaries, & when it terminates.

Anyone doing a living trust with pour-over wills should receive an explicit document instructing how beneficiaries are to be named for funds outside of the will & trust as part of the estate document package. There can be tax or probate implications that cannot be changed once one of the parents dies.


Goldielocks

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Re: How to properly assign contingent beneficiaries to retirement accounts?
« Reply #10 on: September 21, 2017, 02:23:10 PM »
It turned out that to add in directions about how to distribute the trust, or to set one up in the event of a single parent dying, would have added about $400 to the cost of preparing our wills, to customize them.   A basic guardianship for minor children, and naming who the trustee is of the money for minor children (not changing or modifying the default instructions on how to handle the money) was included in the base price.

As I said, YMMV.

There are additional fees at the time the trust is set up, and for on-going trust fees and documentation...  I forget what those were, but for a minor child situation, it would be cheaper through a will than the government setting up the trust for the child.