COMMON BENEFICIARY MISTAKES

Are you aware of the common beneficiary mistakes that can be costly to you and your heirs?

Are you aware of the common beneficiary mistakes that can be costly to you and your heirs? Allow me to introduce Bruce and Ann Friedman. This story came from an article in the New York Post (1/31/2005), entitled “Pension Pickle – Broke Widower Loses $1M to In-Law.” In the article, you see a picture of a happy couple who had been married for 20 years. To summarize, Bruce was set to inherit his late wife’s pension, valued at $900,862, or so he thought. On a technicality, it was actually awarded to Anne’s sister, Bruce’s sister-in-law, leaving him with nothing. According to the article, he never doubted he was the beneficiary because the Teachers Retirement System sent out annual statements that indicated his wife had named no beneficiary. That would make him, as her closest relative, the beneficiary. But after she died, officials found a form that had been filled out 27 years earlier, 4 years before the couple met on a blind date, in 1978. It indicated that Anne’s mother, uncle, and sister should collect. Since her mother and uncle had died, the money was awarded to her sister and Bruce says his sister-in-law won’t give him a cent. “We feel we are complying with the law as it stands,” stated the council representing the Teachers Retirement System. The purpose of this discussion is to ensure that your beneficiaries don’t wake up in a similar situation as Bruce. The following examples are not the only beneficiary naming mistakes, but they are some of the most common.

Common Mistake #1 – Naming Minor Children as outright beneficiaries

The problem is that most states have limits on the amount of money a minor can directly receive through inheritance. This limit is usually quite low, often under $5,000. If the inheritance is more than the maximum allowed, the state will step in and usually require one or more of the following:

• That a financial custodian must be named
• That the financial custodian is bonded. Bonding ensures that the custodian will fulfill their obligations but this may cost over $1,000.
• That a trust or guardianship be established.
• That there is regular reporting

A solution to this mistake would be to name a trust or Uniform Transfer to Minors Act account, also known as UTMA, U-T-M-A, as beneficiary. This action does not require that any special account is established until the death of the owner. The key decision here is that you must name a custodian to the property that you leave to the minor.

Common Mistake #2 – Failing to name a beneficiary or naming the wrong beneficiary to your retirement plan.

If you fail to name a beneficiary, or you name the estate as the beneficiary of a qualified retirement plan, it can create three potential problems.

• Estates are subject to higher income tax rates than individuals.
• These assets will now become subject to probate, which can be a long, cumbersome, and expensive process.
• These assets may have to be liquidated and paid to the estate as soon as five years after death, thus stripping the intended beneficiary of the ability to use a Stretch IRA.**

A solution to this mistake would be properly naming individuals as the beneficiaries of your qualified retirement plans. Doing so properly will allow them to inherit your retirement plan account with more options, such as through a Stretch IRA.** Please be aware though, that based on the size of the retirement account, naming your grandchildren as beneficiaries may trigger the generation-skipping transfer tax. ***

Common Mistake #3 – Naming a trust as a beneficiary. There are three potential problems you may run into when naming a trust as your beneficiary.

The first problem with naming a trust as a beneficiary is that the IRS generally requires assets to be paid to the trust within 5 years after death. The stretch rules** generally don’t apply to trusts unless the trust is drafted to be a look-through trust. If it is a look-through trust, the IRS permits you to stretch the IRA to the trust over the life expectancy of the oldest trust beneficiary. Non-natural beneficiaries would be the problem here; for example, charities, estates, or another trust.

The second problem with naming a trust as a beneficiary is that it can be expensive to establish and maintain these trusts. Even done correctly, a look-through trust can be costly because a lifetime of a legal trustee and administration fees can significantly reduce the amount the beneficiaries ultimately receive.

The third problem in naming a trust as a beneficiary is that more than a 1/3 may be lost to the IRS as soon as the IRA income exceeds $12,150. In 2014, trusts were subject to the 39.6% income tax rate, the highest for that year. By comparison, people didn’t reach this 2014 tax bracket until they earned over $400,000.****

To prevent from making mistakes when naming a trust as a beneficiary, you may want to consider naming natural persons as beneficiaries for retirement plan accounts. If naming a trust, please be sure to thoroughly review the ramifications of doing so with an estate planning attorney, CPA, and a financial professional, to ensure that your plan meets all of your needs without suffering unintended consequences.

Common Mistake #4 – The per stirpes versus per capita quandary

Whoever said that we needed to know Latin? The literal definition of “per stirpes” is “per branch.” This is also known as Right of Representation. “Per Capita” has a literal definition of “for each head.” This issue can deprive people of their intended inheritance. For example, Ward and June were married for 50 years and had 2 children, Wally and Beaver. June passed away suddenly leaving Ward, the boy’s father, with all of the IRA assets in his name. Wally and Beaver had children of their own. If Wally were to die before Ward, Beaver would inherit Wally’s share, and nothing would go to Wally’s children. This is called a per capita distribution.

The solution to this mistake would be, if Dad (Ward) wants to make sure that Wally’s share will benefit Wally’s family, Dad should make sure that Wally’s share will benefit Wally’s family. Dad should make a per stirpes designation. This would ensure that Wally’s half will be shared equally by Wally’s children. This will guarantee that Ward doesn’t disinherit Wally’s children, Ward’s grandchildren.

So in conclusion, designating the proper beneficiary can be a crucial decision in the world of personal finance. The mistakes we just covered are not all of the possible mistakes that can be made, they are just some of the more common and costly mistakes.

Let me finish by explaining the steps in what we call, “The Financial Wellness Initiative Plan of Action”.

Step #1 – Please seek help from a qualified financial professional. Don’t try and self-diagnose or operate on yourself.

Step #2 – Please take the time to meet with that professional for a financial physical or checkup

Step #3 – Remember that a proper diagnosis must always come before any proper prescription.

Step #4 – A proper diagnosis should help identify the problems, not just the symptoms.

Step #5 – Help your financial professional, by being open and honest. In other words, if you’ve had prior bad experiences, let them know that. There are often other remedies of solution. There could also have been a simple misdiagnosis or incorrect prescription made previously.

Step #6 – If a prescription is the best course of action, focus on what the prescription does and not on what it is called or named.

Step #7 – Understand the circumstance and the method for which the prescription is to be used.
Step #8 – Understand that the common definition of “insanity” would be to change nothing and to continually do the same things over and over, yet expect the results to somehow be better than they were before.

Now, there are two final parting questions that will indicate to you the value of the Financial Wellness Consultation.

Important Question #1: Do you plan on living 5 or 10 more years? Well, whether or not you’re planning on it, Uncle Sam is planning on it. Here are the government’s life expectancy numbers based on age*:

• If you are age 55 today, you may expect to live an additional 27.0 years.
• If you are age 60 today, you may expect to live an additional 23.0 years.
• If you are age 65 today, you may expect to live an additional 19.0 years.
• If you are age 70 today, you may expect to live an additional 15.3 years.
• If you are age 75 today, you may expect to live an additional 11.9 years.
• If you are age 80 today, you may expect to live an additional 8.9 years.
• If you are age 85 today, you may expect to live an additional 6.4 years.
• If you are age 90 today, you may expect to live an additional 4.4 years.

Important Question #2: Would you be better off today if you had known all the things that you know now, including what you just learned in this discussion? If you are like most people then the obvious answer is, “Well, yes, of course, I’d be better off today.” Here is the purpose for asking this question – Our job is to help make sure that 5 or 10 years from now you don’t have to come to that same realization.

Here is the secret: The next 5 or 10 years begins today! That’s why we offer our no cost or obligation Financial Wellness Initiative Consultation. Please do not let procrastination and fear of change become your worst enemy. Similar to how a doctor may keep specific time open for new patients only, we set aside specific time open for you to take advantage of our Financial Wellness Initiative Consultation.

I think we’d all agree it’s unfortunate that many people ignore their financial future or spend very little time doing the things that they know should be done. Hopefully, we can help you in this area. Please, make it a priority to call our office. Thanks for reading today and good luck in your financial future.

So what’s the next step?

Your receipt of this report entitles you to a no cost or obligation one-hour session to review and discuss the potential beneficiary designation miscues from your accounts and the frustrations this can cause your heirs. Any customary hourly planning fees will be waived for this one-hour session.

What should you expect at this one-hour session? Below are some frequently asked questions about what we call the “59 Minute Personal Asset Management” consultation.

Q: What will this meeting consist of?

A: This meeting is simply an opportunity for you to ask any questions that you may have related to your beneficiary designations as well as your personal finances and retirement. Throughout the course of the meeting, we will take the time to talk with you and analyze your situation. We’ve found that everyone’s definition of a comfortable retirement is a little different in that everyone’s situation is unique. Our objective is to learn about your personal goals as we explore how to help you retire the way you want.

Q: Why do you offer this no cost or obligation consultation?

A: Simple. It gives us an opportunity to meet folks from around the area that may have questions about financial matters. It’s no secret that we would love new clients. Gaining new clients is the way that our business grows. However, we want to provide a comfortable, noninvasive environment for exploring a new, potential professional relationship – for you and for us. By offering an hour of our time for no cost or obligation, it provides a non-threatening way for us to spend some time with you to see if it makes sense for us to continue discussions into the future.

Q: Will there be a sales presentation?

A: Not at all. In fact, we are very hesitant to talk about any potential solutions to any questions or concerns you may have during our first visit. It’s important for us to understand your goals and desires about what “retiring” or “investing for your future” means to you. We feel it would be financial malpractice to begin exploring solutions prematurely. We tend to look at the first meeting as an opportunity for you to ask some questions, and for us to get to know each other. Furthermore, we can both be more informed by the end of the meeting, which will help determine whether or not it will be advantageous for us to meet again.

Q: How long will the meeting last?

A: About 59 minutes. Most of our meetings are stacked throughout the day. Future sessions may require more time, but we’ve found that an hour, initially provides a good basis for getting to know a little more about each other.

Q: What will happen after the meeting?

A: If we both decide that it would be beneficial to meet again, we’ll schedule another time to get together. At that meeting, we would introduce you to the various areas in which our firm may be able to provide value to your situation. Again, we shy away from offering solutions at this point because we still consider it to be a discovery meeting. At that time, you should be in a better position to make an educated decision as to whether you wish to engage the services of our firm.

Q: Who should come with me?

A: We do ask that if you are married, you bring your spouse with you. If you wish to bring any children with you to the meeting, you are welcome to do so. For that matter, anybody that you may utilize in helping you with your retirement and personal finances is welcome to join.

About the Author

Martin McCann is president of McCann Asset Management and is a practicing financial advisor in Fresno, California. He focuses on retirement plans and wealth management.

Martin can be reached at 559-400-6520 or Martin@McCannAM.com.

Visit the McCann Asset Management web site at www.McCannAM.com