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Law Offices of Ronald W. Rutz
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August 6, 2007: How to Handle Beneficiary Designations

Q: Both my insurance agent and my financial advisor refuse to designate my estate as the beneficiary of my investments and my insurance. In fact my financial advisor questioned whether you knew what you were talking about!

A: Much of estate planning is understanding what we can do in Colorado, even if some techniques would not necessarily work elsewhere. LetŐs briefly review a few of the fundamentals concerning beneficiary designations [often referred to as payable on death (POD) or transfer on death (TOD)].

In most states, a personŐs estate should not be named as the beneficiary, since it might trigger a probate, increase the amount of fees taken by the attorney and the personal representative, or might subject the proceeds to extra taxation.

Probate in Colorado is easy, inexpensive, and efficient, even without an attorney. Whereas probate in most states should be avoided, that is not necessarily the case in Colorado. As to the second point, attorneys and personal representatives are not allowed to charge a percentage feeŃonly a reasonable sum for the reasonable time expended. Thus, the extra liquid funds coming into the estate would not increase estate expenses. Finally, an asset with a beneficiary designation is already subject to tax exposure, if the asset was owned by the deceased. Additionally, although in some states bringing the proceeds back to the estate might trigger additional taxes, that is not the case in Colorado. But again each state must be looked at. One estate planning rule does not fit all states, at least not in estate planning.

But even though the usual rule of not naming the estate as a beneficiary does not apply to Colorado, why not just name beneficiaries and have it done with? DoesnŐt that seem simple and straightforward? Often the residuary estate clause set out in Will differs from the various beneficiary designations. Since the named beneficiary recipients take priority over the Will provisions, the overall intent of the deceased maybe short circuited if POD or TOD proceeds flow in different directions, contrary to the "big picture" as shown in the Will.

If not living, it is often assumed that the share of a named POD or TOD beneficiary will flow to his or her descendants. But occasionally in some investments the deceasedŐs share will revert to the other named beneficiaries and will not flow down the family line, unless specifically stated in the beneficiary designation. Thus the deceasedŐs intent is defeated.

If a named beneficiary predeceases, often a beneficiary wants his or her spouse to receive that beneficiaryŐs share before the children. But writing that out on the POD or TOD form could be hard to do. I have run into a number of situations where there are only so many spaces allocated in the beneficiary designation. Such wording must also be reviewed and accepted by the company. An agent might be reluctant to "bother" legal counsel at the home office insisting that the "standard" wording be used.

The Will already is set up to handle all of the foregoing. It acts as the collecting reservoir for all of the assets flowing into the residuary estate and sees to it that the assets are correctly disbursed the way the deceased intended.

But even in Colorado, there is at least one major exception to naming the estate or the beneficiary. Anything that is tax deferred should usually name the spouse, not the estate, so an income tax deferred roll over of the proceeds into the surviving spouseŐs IRA can be done. But even here, especially for taxable estates, I have had clients decide to pay such proceeds into the estate and have the proceeds subjected to a 15% (could be higher) immediate income tax to avoid a 48% (state and federal) estate tax at the second death.

Now, in working on estates in Wyoming and neighboring states, my advice might differ. But the insurance agents and financial advisors need to understand and to accept that the attorney is the estate quarterback, making these kinds of decisions so that the overall estate outcome blends together.

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