Preparing your estate involves more than ensuring that you have sufficient assets to care for others. You must also determine who will be the beneficiary of which asset and how they can serve them well.
Who Needs Funds Immediately
Some assets pay the beneficiary quite quickly, while other can take a very long time. For instance, life insurance typically disburses funds within a few weeks once the insurer receives the death certificate.
Consequently, it makes sense to leave funds to your spouse or a guardian who can care for your children, rather than a child. Otherwise, they can’t receive the funds until they are of legal age in your state.
On the other hand, assets distributed through a will can take months or years to go through probate. If you are the principal bread earner, you’ll need to make alternative arrangements for your partner and children. One such arrangement is a Revocable Living Trust. It holds the assets and distributes the assets directly to the beneficiaries without going through probate.
Alternatively, ensure they have ample insurance coverage so they have the money they need quickly.
Understand State Laws
Married taxpayers domiciled in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have community rights to marital property they accumulate during their partnership. In Alaska, partners elect to participate.
The definition of community rights varies between states, but typically the partner owns at least half the value of the community property. You can’t assign another beneficiary without a waiver from your spouse as they’re entitled to half the marital property.
Even if you move to another state, the community property is not automatically converted into separate property, so it may not be possible to choose someone other than your spouse.
Explore the Implications for Beneficiaries
Even if you have good intentions, an inheritance isn’t always a good thing for all beneficiaries. Disabled, blind, or elderly persons who receive Supplemental Security Income (SSI) and/or Medicaid might relinquish their eligibility and suffer financially.
Sometimes retirement plans can be rolled over to a beneficiary, but it depends on the plan, whether the death is before or after payments begin, and who the person is receiving the funds. Beneficiaries could pay substantial taxes. Living in a community property state also has tax implications.
Generally, life insurance benefits enjoy tax exemptions, but exceptions do exist. Your accountant will tell you whether you’ll pay tax on interest earned, the generation-skipping transfer tax, or if taxes apply because you own a large estate.
Assign a Contingent Beneficiary
You have plenty of beneficiary options. You can choose one person who inherits everything or several people with a specified split. If you do decide to split your assets between several people, describe what happens to the assets if one of them predeceases you.
You can also set up a trust, give your money to charity or a non-profit, or leave it to your estate. However, one often overlooked precaution is a secondary beneficiary if things don’t turn out as you envisioned.
For instance, your beneficiary could predecease you, they might be impossible to find when you die, or they might refuse your bequest. Choose a contingent beneficiary to avoid confusion and additional legal fees.
Keep the names of your beneficiaries up-to-date on insurance policies and investments and ensure they match what is in your will. If you don’t designate a beneficiary, funds go into the estate and the courts decide what to do with them.
Life insurance should provide financial security for those you leave behind, so keep your beneficiary information up-to-date. Discuss your current situation with your agent to determine adequate policies limits to ensure your loved ones are well-protected.
