PBM
The Importance of Keeping Your Beneficiary Designations Up-To-Date
Patricia Bloom-McDonald • Nov 10, 2019

The bulk of inheritances left to loved ones are usually not held in bank accounts, cars, and other tangible assets. Rather, they are tied up in retirement accounts (such as an IRA, SEP, 401(k) or 403(b)), life insurance policies, annuities, or employee benefit plans or stock options. A will does not govern the disposal of these assets. So, how can you guarantee that your inheritance passes in accordance with your wishes? Review all of your beneficiary designations upon any life changing event, or at least every three years.

Retirement plans and insurance policies are all distributed by beneficiary designations, and are considered “non-probate” assets. Probate is the court-administrated process of taking items that you own in your name individually (i.e. without a beneficiary designation, not titled jointly with someone, and not titled in a trust), and transferring them through your estate and to the beneficiaries named in your will, assuming for these purposes that you have a will (which you should, and if you do not, I would be happy to discuss further). Therefore, your will only “governs” or applies to probate assets, and not the likely greater part of your legacy.

Imagine, for example, you are thirty years old and you have listed your parents as beneficiaries on a $250,000.00 life insurance policy at your new job. At thirty-five, you get married, have a child, and have your attorney draft a will so that your assets benefit your wife and children. You think you are all set, and if you died tomorrow your family would be covered. Unfortunately, if you died without changing your beneficiary designation on that policy, your parents would be receiving $250,000.00 that you meant to benefit your wife and child.

Another problem that can arise from stale beneficiary designations relates to estate planning using trusts. An example will be helpful:

Richard Jones is a single parent and has established a trust in his Will (the “Children’s Trust”) to benefit his children, ages 4 and 7, in the event of his death. If something happened to Richard, he wants to be certain that his children’s inheritances are prudently managed for their benefit by someone whom he appoints, and also that their inheritances are protected from future creditor claims, marital problems, or other similar issues. If Richard’s beneficiary designation on his $500,000.00 retirement account reads “my children,” then Richard’s children will not benefit from the protection of the trust. Rather they will each receive $250,000.00 outright, at age 21. The trust will be bypassed. The correct wording for a beneficiary designation depends entirely on the planning method used, whether a testamentary trust (within your Will) or a revocable trust (separate from your Will). In the example above, the correct beneficiary designation for Richard would have been “Trustees of the Children’s Trust formed under the Last Will and Testament of Richard Jones.”

Beneficiary designations often become stale due to passage of time or the occurrence of life events. Simply forgetting to remove a deceased child (or an ex-spouse) as a beneficiary can have unintended results. If your child predeceases you, is your retirement plan payable to your children “per stirpes” or “per capita?” Per stirpes means that the deceased child’s descendants (children) will receive the deceased child’s share. Per capita, on the other hand, means that your surviving children will divide the proceeds and the deceased child’s descendants will receive nothing. Relying on this language is risky at best. If a beneficiary predeceases you, it is best to immediately change the beneficiary designation to reflect your wishes.

There are also different tax consequences for leaving to your beneficiaries a life insurance policy compared to an IRA. Here is an example.

If Richard Jones left $50,000.00 in a life insurance policy payable to niece A, and $50,000.00 in an IRA, on which niece B is the beneficiary, he may think that he is providing for his nieces equally. But what may appear to be “equal” in his mind will have different inheritance tax and income tax implications for the two nieces. Niece A is the lucky one. She will pay no inheritance tax and no income tax on the receipt of the $50,000.00 of life insurance she receives. Niece B is the unlucky one. She will have to pay both inheritance tax at 10%, plus income tax at her marginal rate, on her receipt of the $50,000.00 IRA. Niece B will receive significantly less than niece A.

I recommend checking your beneficiary designations upon any life changing event or at least every three years, especially if you have plans/policies with several companies or providers. It would also be wise to have an attorney review your beneficiary designations in relation to your current estate plan, as they go hand-in-hand in warranting that your legacy can be used to provide for the ones you love.

Using a Credit Card When You Have a Special Needs Trust

25 May, 2023
A special needs trust (SNT) allows you to meet your needs while receiving government benefits, such as Medicaid/MassHealth and Supplemental Security Income (SSI). When you have a special needs trust, you can use it to pay for goods and services government benefits do not cover, such as therapy, education,and housing. Since receiving income directly from your trust would jeopardize your eligibility for benefits, your trustee cannot give you cash from your SNT. When you use a credit card for permitted transactions, and your trustee pays off the balance with funds from your trust, these payments to a credit card company are not considered income. An SSI or Medicaid/MassHealth recipient who is capable of managing their own affairs can therefore use a credit card to make small purchases, and the trustee of the special needs trust need not micromanage every transaction. In the past, beneficiaries of SNTs sent their bills to their trustees for payment. Today, an individual with an SNT who qualifies for a personal credit card may find that using a credit card is more convenient. Credit cards have several benefits. Using a credit card to manage payments from your special needs trust allows you to maintain independence, gain access to some of the advantages of a credit card, and easily keep records while preserving your eligibility for Medicaid/MassHealth and SSI. Although credit cards can help people manage their special needs trusts, there are also several important restrictions and considerations to keep in mind. Consult with a special needs planner to ensure all transactions are acceptable under the trust's rules and comply with government regulations. The Benefits of Using Credit Cards When You Have a Special Needs Trust If you have a special needs trust, using a credit card has many benefits, including: Independence : Allowing you to maintain your independence. You can use your card to make qualifying purchases yourself. Your trustee does not have to make the transactions for you. Access to the Typical Advantages of a Credit Card : Using it responsibly can help you establish or build credit history, which may be important for your future financial needs. Record-Keeping : Credit cards provide easy record-keeping and a convenient way to monitor transactions from your special needs trust, which can also help special needs trustees fulfill their duty to maintain records. When you use your card, your trustee can observe your purchases and ensure that all expenses are allowable under the trust’s rules. Your statements can help your trustee keep track of funds leaving the trust. Benefits Eligibility : While adhering to Medicaid/MassHealth and SSI’s income and asset limits, you can access funds from your SNT. Credit cards can help prevent your trustee from accidentally providing you with cash payments that could affect your eligibility for government benefits. Considerations When Using a Credit Card for Your Special Needs Trust While you can use a credit card to access funds from your special needs trust for certain transactions , restrictions apply. If your trustee sees a charge on your card that could affect your benefits eligibility , they can flag it for review. You cannot use your credit card to pay for food and shelter, which SSI would cover. When administering your funds, your trustee must ensure that any expenditures are for your sole benefit if you have a first-party special needs trust. While using a credit card is appropriate, you should not use a debit card. Debit cards are considered cash income. Best Practices When using a credit card for a special needs trust fund, remember several best practices. Choose a card with low fees and interest rates. Set a clear budget and monitor transactions regularly. Keep thorough records and receipts of expenses. Consult with your special needs planning attorney. A special needs planning attorney can help you navigate the rules that apply to your trust and understand how to use a credit card to preserve your Medicaid/MassHealth and SSI eligibility. 

How an ILIT can help offset estate taxes

12 May, 2023
With the Federal estate tax exemption possibly about to be lowered, it may be time to think about steps you can take to keep your estate from being taxed. An irrevocable life insurance trust allows you to pass on money to your heirs while avoiding both the federal estate tax, as well as any applicable state estate tax which is currently $1 million in the Commonwealth of Massachusetts. Senate Democrats have proposed lowering the current estate tax exemption from $11.7 million for individuals and $23.4 million for couples to $3.5 million for individuals and $7 million for couples. While it is unclear if this proposal will pass, it is likely that some change to the estate tax is coming. Even if Congress does not take any action, the current rate will sunset in 2026 and essentially be cut in half, to about $6 million per individual. In the Commonwealth of Massachusetts, the current estate tax exemption is $1 million for individuals and is taxed at dollar $1.00. A proposal to raise it to $3 Million and the tax to start at $3 Million (not at $1.00) has been submitted in the legislature but has not yet been voted on or enacted. One way to make up for any estate tax your estate may have to pay is by setting up an irrevocable life insurance trust [ILIT]and funding it with a policy that has a death benefit that would pay your heirs some or all of the amount your estate will be taxed. If you purchased such a life insurance policy directly, it could end up being taxed as part of your estate. But if a trust owned the policy, it could pass outside your estate. While a life insurance trust can be highly beneficial, it is also complicated to set up and maintain properly. The following are some of the requirements: Trustee . If you are setting up the trust, you cannot also serve as a trustee. If you are the trustee, you have control of the trust, which could lead to the trust being included in your estate. You will need to name another trusted person or financial institution to act as trustee. Policy ownership . The trust must own the life insurance policy. If you transfer an existing policy to the trust and die within three years, the policy will still be considered a part of your estate. To avoid this risk, the trust can purchase a policy directly rather than receive an existing policy. Premiums . You need to transfer funds to the trust to pay the policy premiums, which creates an issue with gift taxes. A transfer to a trust is usually not subject to the $15,000 yearly gift tax exclusion. For a gift to qualify for the exclusion, the recipient must have a "present interest" in the money. Because a promise to give someone money later does not count as a present interest, most gifts to trusts aren't excluded from the gift tax. To avoid this, you can use something called a “Crummey” power which gives beneficiaries the right to withdraw the funds transferred to the trust for up to 30 days. As part of the process, the trustee needs to send them a letter, known as a Crummey letter, letting them know about the trust funding and their right to withdraw the funds. After the 30 days have passed, the trustee can use the funds to pay the annual insurance premium. You run the risk of the beneficiaries withdrawing the funds, but if they know that by allowing the money to stay in the trust they will receive more money later, it shouldn’t be a problem. Beneficiaries . The beneficiary of the life insurance policy is usually the trust. Once the funds are deposited in the trust, the trustee can distribute the assets to the beneficiaries in the way specified by the trust. For example, if your beneficiaries are minors, you can wait to have the trustee distribute the assets. Keeping the assets in the trust will also protect them from your beneficiaries’ creditors. The downside of an irrevocable life insurance trust is that you do not have the ability to change it once it is set up, although the policy would effectively be canceled if you stopped paying the premiums. If you are considering this type of trust, discuss it with your attorney.
Share by: