The beneficiaries and you
By Dick Duff
If your market is seniors or boomers in retirement, here are likely planning steps. They'll (a) add life insurance and annuities, (b) roll over 401(k)s to IRAs to gain control and (c) look to home equity as a source of income. These are cornerstones for a successful retirement income plan. Everything has measured asset protection, tax advantages and can be blended into lifelong incomes. However, be aware: There's more to the puzzle. In this column, I'll discuss how beneficiary designations can turn things into a nightmare.
Let's say that Ed and Margie Smith are typical clients. Once, they mostly had real estate, securities and CDs and a so-called conventional savings plan. Gradually they switched into significant life insurance, annuities, IRAs/QPs and home equity for more system safeguards and income in retirement.
As you worked with the Smiths, there were beneficiary planning discussions. Essentially, they named each other primary beneficiary of the policies and IRAs. They designated children from previous marriages contingent beneficiaries. There was some "stretch IRA" planning as well where grandchildren would receive shares of the accounts.
One day you returned from a long vacation to find a phone call from Harvey, Ed's lawyer. The Smiths had died in a car accident where Margie survived Ed for a few hours. Harvey had reviewed their life insurance, annuities and IRAs/QPs and wanted desperately to meet with you. The next day, you had lunch together.
Harvey explained that Ed and Margie had wills and trusts that created (a) marital deduction shares, (b) safeguards in the event of common deaths and (c) provisions for minor beneficiaries who needed money management. Trust language covered what happened if someone died, divorced, became disabled or had financial problems. Since the Smiths were in a second marriage, there were references to pre and post-marital agreements where children from first marriages were assured an inheritance. All estate documents were tax sensitive and even included generation skipping language. The bottom line: Most of the Smith assets now were in life insurance, annuities, and IRAs governed by beneficiary designation forms. Harvey was concerned. These forms didn't line up well with the Smith estate documents. For instance,
1. On one of Ed's policies, Margie was named first beneficiary and his children were contingent. Since she actually survived Ed, her estate would receive these proceeds. If this policy was been paid to Ed's trust, his children would receive the money; they will be upset.
2. On Margie's policies, her children were contingent beneficiaries in equal shares. Since an oldest daughter predeceased her with children, these grandchildren won't receive anything. Harvey had written trusts to cover this possibility. He feared that guardians for these grandchildren would be asking questions.
3. Some IRA beneficiaries are grandchildren - minors who can't manage their stretch distributions. It will be expensive and cumbersome to appoint guardians to handle this matter. Trust beneficiaries would have been better.
4. Some of the Smith descendants are in the middle of divorces and financial problems. Harvey explained that it was too late to get cash proceeds into trusts where these funds could be safeguarded from outsiders. In fact, he didn't think there would be much money for any of the Smith trusts.
5. From an estate tax perspective, it seems that the IRAs, life insurance and annuity beneficiary designations heap money in the wrong places. There are formulas in the documents, but these can't solve the tax problems.
6. Finally, Harvey feels that you should have requested his help with the beneficiary forms. He believes in IRAs, life insurance and annuities. His goal is only to make things better.
None of this happened. As you work through the experience, here's what you decide to do:
1. Contact Harvey, Ed and Margie immediately and suggest lunch the next day.
2. Call all clients for beneficiary planning meetings. They'll bring in estate documents and copies of all current IRAs/QPs, life insurance and annuity beneficiary forms. If possible, they'll assemble paperwork where they are beneficiary of their parents' assets.
3. Secure names of all client advisors involved in previous estate planning. If your clients agree, you'll contact these people and make them part of the process.
4. Assemble a financial and estate planning study group. The emphasis will be on what happens to a financial and estate plan when someone dies, divorces, becomes disabled or faces financial difficulties.
5. Finally, you'll slow down and become more of a counselor than product person. You'll explain the nightmare to clients and prospects. You'll tell them that life is too short; beneficiaries must be "partners" in the planning process.
How fortunate to have this wake up call. It all started with a nightmare in the nick of time.
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