Beneficiary Planning

The following is a copy of the article Mark Lund did for the Business Connnect Magazine, June 2008.  In this article Mark talks about the problems with beneficiary selections on both Life Insurance and IRAs and what to do about it. Enjoy!


What’s in it for me?         

A beneficiary provision for life insurance and IRAs should allow for the naming of a primary and contingent beneficiary. Unfortunately, most beneficiaries will not receive benefits. Here’s why.

Issue: June 2008 Author: Mark K. Lund Topics: insurance | Personal finance

A beneficiary provision for life insurance and IRAs should allow for the naming of a primary and contingent beneficiary. Unfortunately, most beneficiaries will not receive benefits. Here’s why.

The primary beneficiary is the person designated to receive the death benefits if the insured dies. The contingent is the person designated to receive the death benefits if both the insured and the primary die at the same time. Beneficiaries can be a person, a business or a trust in most cases. An irrevocable beneficiary is a beneficiary who can be changed by the policyholder only with the permission of that beneficiary.

Life Insurance Beneficiary Problems

Many individuals designate their spouse as the primary beneficiary and their children as contingent beneficiaries. There are a few problems here. The thought is, if the husband or wife were to die, the money will be passed on to the spouse. If the husband and wife die simultaneously, the benefits will be passed on to the children.

Problem 1: If you and your spouse were in an accident where you died first and your spouse died shortly afterwards, your contingent beneficiaries are not eligible to receive your benefit. This means the insurance company will pay the proceeds of your policy to their probate estate. Let’s say in this accident both the insured and primary beneficiary die at the same time. You would think that the benefit would go to the contingent beneficiaries. This is where the second problem begins.

Problem 2: In this scenario, children were the contingent beneficiaries, however young children cannot be paid life insurance proceeds until they reach the age of 18 or 21, depending on the state. This means that if there is no will, the state chooses the guardians for your surviving children. They may be or may not be whom you would have chosen had you done your will. As such, death proceeds may be paid to the new guardians of your children, which means the children may or may not get the benefit.

Solution: Set up a Uniform Gift to Minors Account (UGMA), a Uniform Transfer to Minors Account (UTMA) or a trust in the children’s name. Both the UGMA and the UTMA are free. With either a UGMA or a UTMA the insurance company will pay the death proceeds into the account. When your children reach the age of majority they will then have access to the money. However, most parents would not want their 18-year-old child to have access to $5,000 to $1 million. So, the next best thing is to set up a trust as the primary and contingent beneficiary. This way, you, as the insured, can choose at what age and what amounts of money will be distributed to both the primary and contingent beneficiaries. This does cost a little, but is the best alternative.

Problem 3: What if you are the only person to die in an accident? Your spouse still may not get the benefit, even if they were the primary beneficiary. Here is an example why. Let’s say your primary beneficiary received a death benefit of $500,000. They later get remarried. The new spouse talks them into buying that dream house on the mountain. Everything is fine at first but for some reason they end up getting a divorce. During the divorce settlements, the house is given to your surviving beneficiary’s ex-spouse. In this example, since you put your spouse as the beneficiary, you ended up paying your benefit to some stranger who marries your spouse after your death. How do you feel about that?

Solution: Set up a trust as the primary beneficiary. This way you control the money from the grave.

We did not even talk about other issues, such as stepparents or stepchildren, special needs beneficiaries, or whether to designate beneficiaries as per stripes or per capita. Every insurance policy should specify one or it is automatically deemed per capita. If you have any questions about your beneficiaries or need help setting up your life insurance, give me a call and one of my staff will arrange a mutually convenient time for us to talk.

IRA Beneficiary Problems

You may think that if a trust is the best selection for your life insurance that it must be good for your IRAs as well. This will, in most cases, cause more problems. Generally speaking, you should never name a trust as the beneficiary of your IRA, even if your attorney tells you to do so. Trusts as IRA beneficiaries create unique problems and tax complications, even when executed perfectly. If the trust fails to qualify as a designated beneficiary, then there is no designated beneficiary, and the trust beneficiary will not be able to stretch post death required distributions even over the surviving spouse’s life expectancy. In that case, the IRA will be paid out either under the five-year rule or over the remaining life expectancy of the deceased IRA owner.

Let me just say there are many more issues to discuss with life insurance, IRA or 401(k) beneficiaries. Hopefully this got you thinking about what you have. If you have questions about beneficiary selections, feel free to contact me.

Mark K. Lund is a asset manager at South Jordan-based Stonecreek Wealth Advisors Inc. He can be reached at 801-545-0696

Copyright © 2003-2008 Lumin Publishing, Inc. All Rights Reserved. | Connect Magazine Blog

Since this article appeared in the Connect Magazine we have put together a program to get your Will completed.  By going through this simple process with us you will resolve any issues you may have had with the problems discussed in this article.  Please call our office today to find out more about how we can help you properly set up your beneficiary designations.  If you like what you learned in this article you can get even more ideas by subscribing to our monthly newsletter.

If you or someone you know needs some help managing retirement assets, setting up a retirement savings plan, or have life insurance needs, just give us a call at 801-545-0696.

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About the Author ()

Mark K. Lund is the firm's founder, CEO and author of The Effective Investor, a #1 Best Seller. He has written articles for or been quoted in: The Wall Street Journal, The Salt Lake Tribune, The Enterprise Newspaper, The Utah Business Connect Magazine, US News & World Report, and Newsmax.com, just to name a few.  Mark publishes two newsletters called, “The Mark Lund Growth Report” and “Mark Lund on Money.”  Mark provides CPE (continuing professional education) courses for CPAs.  You may also have seen him on KUTV Channel 2, or as a guest speaker at a local association or business. Mark provides investment and retirement planning services for individuals and 401(k) consulting for small businesses. In his book, The Effective Investor, Mark exposes the false narrative magazines, media, big Wall Street firms, and most advisors want you to believe. The good news is that Mark will show you that you don’t need their speculative ways of investing in order to be successful. Get a free copy when you schedule your initial consultation.

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