"Orphan" Assets: Finding a Good Home for Yours in 2008
By Barbara H. Cane, Esq., P '92
Many people have never made a will, but they are aware of their inaction, even if they don't fully appreciate its consequences. But assets like an IRA, 401k, 403b, Keogh, SEP, company pension, group and individual life insurance policies, annuities, employee death benefits, are assets easily overlooked. They are very easy to set up; often they grow slowly, and they are easily lost in the shuffle when you change jobs or the investment house where they "live" changes. But their casual and elusive nature is deceptive. Large or small, they are often the overlooked "orphans" of an estate plan. Take time to give yours the right home!
These assets pass by beneficiary designation. That form you signed at the bank, in your employer's HR office, at the brokerage house, or in your living room while the insurance salesman looked on was actually a contract that determines who will get your wealth. Probably the process was very casual---you hadn't reviewed endless drafts, discussed your choices with a lawyer, and no witnesses were present to solemnize the occasion or attest to your mental capacity. The forms looked "standard," were not tailored to you, and contained "default" choices which were not obvious or explained. Worse, your original forms may have been lost in a flurry of corporate mergers and physical moves, or you may have simply forgotten what choice you made "way back when." One client of ours, a single woman, was positive that she had named her sister as her IRA beneficiary. We urged her to check: the beneficiary was not her sister, but a man she broke up with a decade ago!
Do an inventory of your "orphan" assets and review your findings with your lawyer or other advisor to see how your choices fit in with your estate plan. Here are a few guidelines to help you think about your beneficiary designations:
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"My estate." This is a common beneficiary choice, but a very poor one. If the asset is a retirement account like a conventional IRA, a 401k, or a tax-deferred annuity, by choosing "my estate" you will trigger unnecessary income tax. Unlike a natural person (and certain trusts), an estate has no life expectancy over which to spread payments, so tax deferral options are lost. Also by naming your "estate," you turn a non-probate asset into one that will require a court procedure, with its attendant delays and costs.
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"My spouse." If you have a spouse, this is usually a fine choice, especially because a spouse can roll an IRA into his or her own plan, potentially gaining additional years to defer recognition of income taxes when money comes out of the plan. Similarly, a spouse will probably have a good range of choices on how to take an annuity. But if you have a taxable estate (over $1,000,000 in New York State), check with your advisors to be sure your choice of beneficiary serves your estate tax planning goals. In particular, you may want life insurance to pass to a credit shelter by-pass trust for a spouse in order to reduce estate taxes overall.
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"Susie Jones," where Susie is your domestic partner. Happily, this is now a possible choice on an IRA! Susie can spread out recognition of taxable income, even though only spouses can do an IRA rollover. Of course, a domestic partner can be a beneficiary of life insurance.
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"My children, Tom Doe, Dick Doe, and Harry Doe." This is a good choice too---but not if Tom, Dick and Harry are minors or disabled. In those situations you need help to craft trusts to receive the funds on their behalf, but retain still the tax deferral benefits which may exist. If the beneficiary has a disability it is essential that he not receive assets in his own name. Talk to your lawyer!
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My grandchildren, Alpha Doe and Beta Doe." Again, watch out for minors! One granny named her granddaughters as the beneficiaries on an IRA, but the little girls could not receive funds in their own right. Their mother had to be appointed by the court as their legal guardian (and post a surety bond!) before she could take distributions on their behalf...and she has to file annual reports with the court until they are eighteen! Since the beneficiaries are members of a "skip" generation, be sure to check generation skipping tax implications with your advisor.
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"Barnard College" (and other charities!) This is a wonderful choice! Charities can always be named as the beneficiary on an insurance policy; this might be a great solution for those group policies or policies your family doesn't really need. But charities are especially good beneficiaries of a tax-deferred asset like a traditional IRA, 401 (k) or tax deferred annuity. Since they pay no income taxes, they get 100 cents on the dollar---no individual beneficiary can do that! If you have a choice, give charities the tax deferred assets and individuals the "regular" assets. For example, if you want your nieces to each get $100,000 and you want Barnard College to get $200,000, give Barnard the IRA and give the nieces cash gifts under your will or trust. Samantha and Madison will be happy to have $100,000, not $100,000 minus the income tax they will have to pay on each IRA distribution, and Barnard will appreciate the gift of $200,000 deeply.
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Use beneficiary designations to fund legacies. Use a beneficiary designation to fund a major gift to Barnard College or another charity. If you have created a foundation or a donor advised fund, consider using a beneficiary designation to augment it. One of the "orphans" could be transformed into "philanthropic capital" for the next generations to carry out your dreams and theirs.
Even though they may have.come into being without careful thought and may have been ignored over the years, take time to review your "orphan" assets that pass by beneficiary designation. See what they are, how much they are worth, how they fit into your overall plan, and how you can harness them to serve your hopes and dreams for the future.
© 2007 Barbara H. Cane