Beneficiary Designations - Strategy Matters

Hey everyone, it's Phil Clark from OmniStar Financial Group. Got another great edition of We're Talking Money. Today we're going to cover beneficiary designation, or designations, and strategy here really matters. Dustin, we got a great show on today. Welcome aboard, how you doing?

I'm doing great. Excited to be here, excited to talk to you.

Let's do it, let's do it. We'll be right back. Don't go away, you don't want to miss this show.

Wealth can be measured in many ways. As it grows, life can quickly become complex, creating the need for more focused planning. Welcome to We're Talking Money with OmniStar Financial Group. OmniStar's been helping clients achieve financial success for more than 20 years in a client-centric and stress-free environment, with a reputation built on a long track record of working with people who want to grow and protect their assets. OmniStar illuminates the blind spots, provides actionable strategies to help you achieve what's most important. This is where you can count on straightforward and unbiased advice from a team of professionals that are passionate about your success.

Dustin, we got a great show today, and beneficiary designations, misunderstood in a lot of ways. Seems simple, not always as simple as what most people think. I remember starting my career 30 years ago, naming beneficiaries was mostly associated with simple things like life insurance, annuities, things of that nature. Today there's a wide range of financial products that are used, so talk about that a little bit, Dustin.

Sure. Well, there's a lot, certainly a lot of blind spots when we think about beneficiary designations, and things have definitely changed, and for the better. Now when an account owner dies, the assets go directly to the beneficiaries, bypassing the sometimes long, costly probate process. Additionally, because these beneficiaries override your will, and we'll dive into that pretty detailed here in a second, it is so important to coordinate beneficiary assets within your overall estate plan.

Yeah, well said. People don't often realize the importance of beneficiary planning. In fact, we find that carelessly named beneficiaries on financial accounts, it easily leads to disinheriting a loved one, could cause a special needs dependent to lose government benefits, could create huge tax bills. I always ask the question, Dustin, why do you think this seemingly easy thing is so often missed?

I think that many times people just simply don't get good advice, whether it's attorneys or financial planners, that they often fail to provide needed direction to reach the client's goals. And don't forget, depending on the circumstances, this kind of planning can be confusing for the untrained eye, and we know how it is when you get confused. All of a sudden procrastination or a set it and forget it attitude sets in. Many people simply don't remember who they named as beneficiaries.

For example, a gentleman planned to leave everything to his long time significant other, and in his final days he recalled naming some of his relatives as beneficiaries, and when he tried to go change that beneficiaries, they had pre-deceased him. And so ultimately it just became a big mess in a family dispute and a large lawsuit, just a whole mess of things just because he, the lawsuit thing, you were talking about this creating a...

It was unfortunately, the assets got tied up, they became part of a family dispute. It happens all too often. So it's true that if you ignore these things or you don't understand them, it's going to lead to consequences. So I can't tell you how many times we've seen this beneficiary designation become a problem, and often the wishes of people are not congruent with what it is that they were really trying to accomplish, Dustin. So it's frustrating to us as planners, because we know that it's so important, yet so many people ignore it.

So the other thing that can be frustrating is many advisors out there profess to review beneficiary designations regularly. Now that's relevant, I guess, in a lot of ways, but what is regularly, and how do they compare that? So for us, regularly is every year. But if they're not doing that with their clients, say every few years or immediately following a life-changing event such as a marriage or divorce, birth of a child or death of a loved one, these things can quickly be forgotten. They get out of control, unintended consequences occur.

However, years, as we say, they come and go, and beneficiary reviews, they just fall into the abyss. They were forgotten. Good intentions, well, you know what they say about good intentions. So why is this? And I can't speak for other advisors, Dustin, but I can sure tell you that failing to talk about beneficiary designations leads to unintended consequences.

And another good idea is keeping track of all of those designations. Our clients use our OmniCAP system, and if our clients are listening, you know exactly what we're talking about. It allows them to keep everything in one place. They see it, and that allows them to not only understand what they're doing, but when a change occurs, it almost alerts them to say it's time to have a conversation with us so we can make those adjustments. But bottom line is, don't expect your bank or broker, your insurance agent or an IRA custodian to tell you if something is amiss with your beneficiary designations.

And I almost forgot, Dustin, another overlooked area for beneficiary designations are those retirement plans. That's where the majority of people's assets live. And so keep in mind that those wishes don't carry over when you roll your 401k to a new employer's plan or to an IRA, or when you convert to maybe a regular IRA to a Roth IRA, something like that. It doesn't always convey. So don't fall into that trap of forgetting to go back and re-name your beneficiaries.

So when it comes to naming beneficiaries, as with most things, Dustin, you and I know this well, one size doesn't fit all. Designating where you want assets to go in most cases requires more than simply naming your spouse or a family member. Things like trusts can be beneficiaries, inherited IRAs, per stirpes. Boy, we talked about that on a call today. Very important, and it wasn't written in the will, yet the attorney told this client that it should be part of the general statutes of their state. Well, maybe that's the case, but this client's son is an attorney, and even he told his mother, you really need to get that double checked, because maybe we need specific language in there. It may be fine, but that's one of those blind spots that should, in our opinion, be illuminated.

So per capita, another designation that's mostly used in legal documentation. Charities, those could be beneficiaries. Life insurance, annuities, as we said, and then wills. So a lot of things here, Dustin, and so let's start illuminating the blind spots. There's a lot of them. Some of the most overlooked beneficiary planning opportunities are right in front of us with beneficiary designations. Let's start with the basics. What kind of accounts can have beneficiaries?

Well, a lot of accounts now can have beneficiaries. It wasn't always like that. U.S. savings bonds, they've had forms for naming beneficiaries for more than 50 years. Bank accounts, certificates of deposits, that can be made payable to, POD, or payable on death, as in POD, is like, right, like we like to refer to him, to a beneficiary. Then came the so-called transfer on death, or TOD, registrations for securities, including stocks, bonds, mutual funds. Life insurance benefits and retirement plan assets are paid directly to the beneficiaries on those accounts.

POD and TOD accounts were devises alternate to join accounts, which also bypass probate. So when one account owner of the joint account dies, these assets automatically go to the surviving owner. But this is not a particularly safe way to leave all those funds, because once they switch over to the co-owner, all of a sudden the assets are subject to your, to those co-owners' creditors.

Yeah, that's a big blind spot. I don't think a lot of people realize that. We talked about it in that meeting today. People will leave money to someone to act as the safe keeper of the money for, say, another family member, and to them it's an okay way to do it, and on the surface it seems reasonable. Fact of the matter is, when you leave anything to someone and expect them to do the right thing and give it to someone else or divide it, whatever the case may be, their intentions were probably really good, and the beneficiary probably intends to do the right thing. But all of that money, all of that inheritance, is now exposed to their creditors. And so if anything goes wrong in their life, what you intended to go to maybe another child or another member of the family, it may never get there if the person that received it had problem or problems with creditors or legal issues or whatever.

So let's move on to the next blind spot. Whom can I name as a beneficiary?

Individuals, trusts, charities and other organizations, your estate, or perhaps no one at all. You might specify one or more people. You might name a specific group of individuals, such as all my grandchildren who survived me. This might include current and future grandkids and really spare you from having to update forms as your families change and grow. However, it would be general to it not include, it wouldn't include step grandchildren, so you'd want to designate those by name. And then one thing to think about is to avoid the tendency to choose different beneficiaries on each of your accounts.

So what you're saying is there is a huge number of people or entities, types of beneficiary designations here. It's not limited to what a lot of people think of, which is your spouse or a child. There's a lot of that, there's a lot of options when it comes to naming a beneficiary. So to your point, you got to avoid the tendency to choose a different beneficiary of each of your accounts. That's an important one, Dustin.

You all too often talk about this case where a woman left her estate equally to her two daughters. She did this in her will, but she named one daughter as the beneficiary of some various bank accounts and some brokerage accounts. The result was not what she intended. Most of her assets passed outside of the estate. That was okay. One of the daughters, however, received much more than the other.

Now in this case, the mother could have named both daughters to those accounts. That would have equalized things as she wished. Or she could have avoided naming them on those accounts and simply allowed the accounts to go to the estate, where her will would have dictated how that money was distributed, which would have been 50 to each daughter. That was exactly what she wanted. So where these assets would have been distributed according to her will would have been a simpler way to do things. Instead she complicated it and ended up, there was unintended consequences, and who knows how the daughters felt about that, but it certainly didn't end well.

Sure. And watch out too for beneficiary forms that don't allow your assets to pass, like we talked about, per stirpes, or equally among the branches of your family. Say you name your three adult children as beneficiaries of your IRA. If you predecease one of them, you might want that child's share to go to his or her children. However, many standard beneficiary forms provide that your two remaining adult children would actually share the pot.

Yeah, that one is a, that's a huge blind spot. Most people don't, they don't begin to think that way. They're thinking, well, if I name my children, then it's naturally going to my children. If one of them predeceases me, then I don't have to worry about it, because it's going to go to my grandchildren. Well, that's not always the case. As you just pointed out, it can easily bypass your children, end up with, or your grandchildren, and then the other two children, they end up getting what was intended for your grandchildren.

I think it's best to ask a lot of questions. Be sure you understand these things. Work with a team that understands these things, and a team that's willing to advise you on those things. We had that question asked of us today by a new client. He said, I'm tired of the bankers that I work with and the institutions that I work with. He said, they come and ask me what I want to do, and he said, that's why I'm paying them. So can you do those things? And that was his biggest pain point, was not getting advice, yet that's what he thinks he's paying for.

So another big point, blind spot: confusing designations and wills. In the opening comments we talked about this, but we want to elaborate on this huge blind spot. This is big. Many people consider their will to be the primary way, and you talk about this a lot, Dustin, the primary way for determining how someone's assets are passed on. Likely because that will is a sanctioned document, it's composed of official legal jargon, these things are expensive, and it's viewed as the uncontestable word when it comes to asset transfer.

It's a misconception. It has lots of cool words and it sounds really sophisticated, doesn't always get the result that you think it does. So misconception has cost many families a lot of heartache, a lot of money. Contrary to this misinformation, certain assets which use beneficiary designations, they actually can bypass that will or supersede the will. So doesn't always give the person what they're hoping to achieve for their beneficiaries. And I think if you just get one or two things out of this podcast, that would be it right there. Beneficiary will trump the will, and most people just don't know that. It's a big blind spot.

And that is a key takeaway. The beneficiary designations often, man, they trump everything. Got to be careful with that one. So, and the other one that's a big

One is just missing a beneficiary. So just failing to designate a beneficiary can be a very costly mistake. Consider your retirement account. If you haven't named the beneficiary, that account could get passed to your state, and if this happens, your heirs could be just required to take the distributions, which would be fully taxable at that point. However, if you named your spouse, for example, as the beneficiary, they would have the option to roll over the funds in a way that defers or minimizes taxes. And even if you're charitably inclined, naming a charity as a beneficiary of a retirement billing can also be a really good tax saving strategy.

Absolutely. I want to just interject one thing. You were talking about retirement plans missing a beneficiary. I was reading a review of one of our large corporate 401k plans, and I was looking at, we track all of the incoming or what we call inbound calls to the call center, and we're tracking why they call. 56 of those calls were related to beneficiary designations. 56 percent. That tells you a lot. It tells you how important this is, but it also tells you how often it's missed, right?

So people are calling in at that, that's a huge rate, and they're calling to establish a beneficiary designation because they didn't do it at the outset of the plan. That tells you that people miss it all the time, or they go through a life change and they just fail to update it. And then finally we go and do education, and then you see those phone lines light up a few days later. 56 percent in this case. Right after we just did enrollments, all of a sudden 56 of the calls were about beneficiary designations. At least we know what we're doing helps, but that tells you that people are missing this very important blind spot, and we're certainly illuminating that, which is great.

Absolutely. And one thing to think about is, even if you choose a primary beneficiary for your main accounts, you may want to consider adding a secondary beneficiary as well, in a case where the primary may not be available or potentially, like you're talking about earlier, declined the inheritance.

Yeah, absolutely. So big blind spot. All of these are big blind spots, but some of these particularly of interest when you're trying to get your planning dialed in and carry out your wishes. And we never know when these things are going to be used, and so getting them right now is the right time.

So what's next? We talked about the primary, or rather in the case of the beneficiary, making sure that you name a primary and a secondary in case the primary is not available or declines. Let's talk about the next big blind spot, which is not reviewing and updating beneficiary designations. Gets missed all the time with estate planning in particular. Not uncommon to see what you say, the set it and forget it mentality, passive approach, something that we think is a recipe for disaster.

So everyone deals with life changes at some point. Everyone, you're listening to this podcast right now, you've dealt with a life change. We all do. Could be having children, could be grandchildren, divorce, loss of a loved one, list goes on. Such changes, those should automatically prompt a review of beneficiary designations, choices and adjustments whenever conditions warrant. You can adjust these things as many times in your life as you want to, but failing to adjust them can be very consequential. So I know you've got an example you're going to share with us, Dustin.

So yeah, a great example is if your primary beneficiary predeceases you and you fail to update the beneficiary designation.

Yeah, what happens then?

So at that point, your assets will likely become part of your estate, which are subject to legal process that called probate, and this innocent oversight could result in unnecessary costs and delays. Such an outcome could easily be avoided with a stroke of a pen.

Yeah, so true. Stroke of a pen, a little bit of ink, and boom, you saved tons of money, you saved the effects of probate delays. Beneficiaries sometimes can be delayed nine months, ten months, a year, so might as well avoid that if possible.

In the case of qualified plans, some may automatically name your spouse or child as a beneficiary. The best plan, however, is making sure you have designated beneficiaries that really reflect your wishes and you review them annually. Remember, the only person responsible for beneficiary designations at the end of the day is you.

Yeah, so important to remember that. So not keeping track of your documents. Now, we alluded to this early in the show, but let's talk about this more specifically. So anyone's plan can be affected by a lot of external factors. We know that major changes at an institution are things they don't think about. An insurance company or whatever it may be, a retirement plan company, maybe they change or merge with another provider, maybe there's an acquisition, whatever that case may be. Those things can result in your beneficiary designations being lost.

And so if they don't transfer, maybe a new system was implemented at an insurance company or at your retirement plan company, if you don't update those things, then it's going to affect you, and it probably is in a negative way. So you should request copies of your plan documents periodically and periodically verify that the documents have matching information, that everything's up to date. Otherwise someone's going to be very disappointed, and it probably is going to unnecessarily cost a lot of money.

And one of the ones that people may not think about is, what is, how is this going to impact my beneficiaries? And so the obvious one that people think about here is that the beneficiary is not prepared to handle a sudden influx of money. Inheriting significant sums can encourage very poor financial decisions. For example, naming a young adult child who may not quite be prepared to manage such a windfall might result in some unwise short decisions and reduce the lifespan of the inheritance. And then at the opposite end of the spectrum, what we see a lot is leaving large inheritances to family members who already have significant wealth could suddenly be facing massive estate transfer taxes.

Dealing with it right now. One family that we're working with, that very thing has really been, it's really been the center point of most of the planning. They, throughout this family, it has quite a few extensions or branches, but every part of the family needs help with planning. But probably the catalyst for all of this planning was the concern about the transfers from the matriarch, as it flows through these branches, is going to create a lot of problems. And it just answers the question, whether you leverage a trust or other estate planning strategies or whatever is the right thing, just making sure that you're working with a financial professional, it will keep all your priorities, making sure they're being met an effective way for both you and your beneficiaries. So important.

And another blind spot: whom should I name as a beneficiary? We said who can be named and what can be named, but who should I name? And right out of the gate, minors, disabled people, and in certain cases your estate or spouse are people that should not be named. And people don't think about that a lot, but it really depends on your objectives. Frankly, avoid leaving assets to minors outright. I think that's a big one that's misunderstood.

And if you do that, a court, if you leave money with them or leave an inheritance to them, a court's going to appoint someone to look after those assets. That may not end the way that you wanted it to. And when a court appoints someone, that's a pretty cumbersome process, pretty expensive process, and the person that ends up being named the guardian ad litem might not be someone that you would have named, right? Might be someone that you don't know. And so that could end up in a not so good outcome. And so then you think about what can happen when the money reverts to the child at age 18 or 21. I start thinking about Porsches and Ferraris. These kids inherit these big sums of money and they're not ready for it, and all of a sudden a lot of hard-earned wealth is lost.

So special needs dependents, another big one that we talk about a lot. That could be children or adults, Dustin. Small outright inheritance, small key word here, a small inheritance could prevent that child or that adult from getting certain aid that is given by the state or the federal government. So a special needs trust or a supplemental needs trust would be appropriate in this circumstance. So more on that in another episode. That is an episode by itself, but a great part of planning, shouldn't be ignored. If you have a special needs child in your family or in your life, make sure that the family or your friends, whoever it is that you know with a special needs person, be sure they understand how important it is to have special needs planning, i.e. a trust or a special needs supplemental trust in place. Very important.

And then retirement plans. Biggest mistake that we see is to name your estate as a beneficiary. Why? Tax. Everything inside of a 401k or retirement plan, Dustin, we say this around the firm, 30 of that money roughly belongs to Uncle Sam. That is untaxed money, and a big part of it belongs to Uncle Sam. The slower we can get it out of those protected environments, the better. It allows it to stay with the beneficiary longer. But if it comes out quickly, that means a lot more tax.

So when you die, the full amount of that plan would be paid to your estate if you named it to the estate, and all of a sudden maybe half of it's gone to taxes. What an unintended consequence, and that's just poor planning. So individual beneficiaries, by contrast, they could stretch that distribution for 10 years. Big difference. Keeping it inside of the tax deferred environment for an additional 10 years, huge difference in net dollars to the beneficiary.

So because many people have large portions of their assets in those retirement accounts, they also need to be sure that the combination of distribution arrangements on those assets and their wills provide for family members as they wish. Don't be the subject of poor planning. And also don't forget about complex situations like a second marriage when there's children from the first union. More on that in another episode, but that could be a huge blind spot. Another blind spot is, what if you just simply don't name a beneficiary?

Yeah, boy, that's a big question. And that is a big question. It really gets broken out in two categories. For non-retirement assets, the first, the funds would typically flow into your estate and be distributed according to your will, assuming that you have one. For retirement assets, it's not quite that simple. The funds would be distributed according to your administrator's plan documents, for example, to your spouse if you're married or to your estate if you're not. And this can happen inadvertently if you don't update your beneficiary forms, or when beneficiaries die, or if you don't name a contingent beneficiary. Remember, a contingent or a secondary beneficiary is the person or entity you want the proceeds to go to if your primary beneficiary predeceases you, and there can be multiple contingent beneficiaries.

Yeah, we've seen a page of beneficiaries attached to documents that we submit for or on behalf of our clients. So yeah, that's exactly right. Don't simply stop with a primary beneficiary.

A good example of that stretch provision that you were talking about over the 10 years: a widow suddenly dies, let's say, for example. Now, this widow had a one million dollar IRA, and the beneficiary was her husband. If the widow failed to update her beneficiary designation following her husband's death, her million-dollar IRA would have gone directly to her, in her estate, instead of going to her children, triggering a large big tax bill and preventing her children of being able to take advantage of pulling that up over 10 years, like you had said.

And I'm pretty sure that that would not be her wishes, right? If she could have avoided that, or if she could have come back for 10 minutes to unwind that mistake, she would have done it, because that one failed part of her plan cost beneficiaries a lot of money.

So how do we put all this together? What does all of this mean? You've got beneficiary designations, blind spots galore. Putting it together, developing a plan, there's a few steps. Let's talk about those steps. So the first one, we said this a little while ago: inventory all of your assets. Before you can start determining what and how much you want to go to your beneficiaries, you got to know what the assets are and what makes up your estate, what you want to be in your estate, and what should be moving outside of the estate. All of those things are so important.

Our clients use OmniCAP. That's our centralized advanced planning system. Great technology that allows our clients to literally, it's a repository where everything lives, all of their accounts. Everything's live. They have a place where everything is safe kept, and this allows easy access for us, for them, for all of their professionals on the team. It allows everything to be seen in one place, which promotes better planning. So that's important.

Things like traditional IRAs are included, Roth IRAs, 401ks, any type of retirement account, life insurance policies, including those provided by an employer, very important and often missed, bank and brokerage accounts, 529 plans, investments, mutual funds, real estate, that includes your home, that includes any investment properties, business interest

personal property, you name it, all of it can be placed there. Whether it's our system or anyone else's, having everything somewhat consolidated, if you want to call it that, but a way to see everything in one place makes it a lot easier to plan. When it's scattered, you're going to make mistakes. Unintended, but you're going to make mistakes.

Absolutely. Step two would be developing the plan. Dustin, tell us a little bit about that.

Yup. So after you've inventoried all of your assets, now you can start to develop the plan. And so once you have that comprehensive view, also known as your estate, it's time to think about what happens following your death. Where do these assets go? Your spouse, children, grandchildren, charities, or perhaps a combination of all the above?

Next, will your beneficiaries receive an outright distribution or have a specified access to the assets over time via trust? And there's no right or wrong answer here. It's rather just having a plan that directs how you want your assets to be divided and distributed.

For some, a trust is the best option. It provides control over how assets are distributed. Trusts can be direct beneficiaries of any type of account, and the trustee makes distributions from the trust according to your wishes.

Great points. Putting together that plan once you inventory everything, as you said, now we know what the estate looks like. Build the plan, and then that plan needs one more thing, and that's step three. Reviews should never go out of style, but I can tell you what does go out of style: the best laid plans. They eventually go out of style. Life changes happen. Things go right, things go wrong. That should be prompting adjustments, right? You can't just set it and forget it.

Ongoing reviews are critical. They're imperative. You've got to do it. And so the best laid plan might be good today, but if we don't review it on a regular basis, a few years from now it may be out of style.

So lots to think about. We gave you a lot of information, probably a little bit of overload. Good news is you can hit the play button and listen to it as many times as you need to, or you can call us, you can reach out to us by email. If we can do anything to serve as a resource for you, please let us know. We're happy to do it.

In the meantime, we'll be working on more shows. We've got a lot more coming your way throughout the year. Hit our subscribe button, like, give us a thumbs up if you liked our show. And if you have comments, suggestions, want to talk to us about what you'd like to see on the next show, please share those comments with us. Until next time, take care. Thanks for watching.

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