Just completed your estate planning? Let’s be sure. You have a Will? Super. Powers of Attorney? Terrific. Living Will? Excellent. Now, have you checked the designations on your retirement plan? Life insurance? Health Savings Accounts?
While a Will remains a critical part of an estate plan, it doesn’t get the whole job done for most modern estates. For dealership owners, executives, and managers, a retirement plan (an IRA, 401(k) or the like) likely represents significant value. Disposition of these accounts is directed primarily, if not exclusively, through beneficiary designations and not through a Will. Other employment-related benefits such as dealership group term life insurance and health care savings accounts also pass by their beneficiary designations. Significantly for dealers, the proceeds of life insurance acquired as security for financing, or for key-man or buy-sell purposes, will pass only by beneficiary designations even where a stock purchase agreement or loan document directs use of the proceeds. In short, whatever your Will says, it generally has no effect on assets with beneficiary designations.
Having no designated beneficiary, naming the wrong person or not having a contingent beneficiary designated are three common scenarios we see. Each can have significant negative consequences. For tax purposes, because most retirement plans are funded with after-tax dollars, naming the right beneficiary affords the opportunity to defer taxable income and minimize tax. Failing to update beneficiaries after significant life events such as divorce or death of a spouse or child can result in plan benefits being paid to the wrong person or to a minor for whom a guardianship may need to be established through the courts. While making these arrangements, it is best to check that beneficiaries named in other places (i.e. your dealer franchise agreement) are up-to-date and match the estate plan set forth in your Will.
More complex estate planning requires focused coordination between beneficiary designations and Will or Trust provisions. This sort of planning can protect vulnerable beneficiaries (young children or beneficiaries with special needs or a history of substance abuse or mental health challenges). Second marriages may necessitate special attention to planning with retirement plan assets and insurance to balance the beneficial interests of spouses and children. But whether your estate requires complex or simple planning, your plan is not complete without consideration of those all-important beneficiary designations.
Always consult your professional advisors on the tax and distribution implication for naming beneficiaries.