Beneficiary designations

At least that is what my kids tell me when they ask for money.  I guess I have been a little slack in teaching them the importance of giving to charitable causes.  In looking back on my various topics for Counselor’s Corner, I found also that I have not mentioned charity enough.  In these times of economic uncertainty charities are in more need than ever.  How can you help?  Give now! If you can’t do that at least include a provision for charity as part of your estate plan and here’s how:

1.  The easiest way to provide for charity in your estate plan is to include a bequest in your Will or Living Trust.  You can name one or more charities to receive a specific dollar amount or percentage of your estate.  It is as simple as that.  You can also provide that a specific asset will be distributed to charity at your death, but you should check with the charity first to make sure they can accept that particular asset, especially if it involves real estate.

2.  An even better option is to name charity as a beneficiary on a portion of your retirement assets.  You can list a charity as a beneficiary to receive a certain amount or certain percentage of your IRA or 401k.  Since the charity is a tax exempt entity it will not incur income tax when it receives its share of the retirement asset.  This is a great way to leverage the value in your retirement assets, even if it is at the expense of Uncle Sam.

3.  For clients who desire to provide a substantial gift for charity, they may benefit from the use of a charitable remainder trust (CRT).   A CRT allows you to give an asset to charity while retaining an income stream for life.  The special tax treatment of a CRT allows the donor to make a gift of low cost basis assets, which can be sold without incurrence of an immediate capital gain tax; the tax liability is recognized only as the funds are distributed to the life beneficiaries (similar to qualified retirement assets).  This provides the donor a tax efficient option to diversify a large asset  holding.  The donor also benefits from an income tax deduction for a portion of the value of the assets transferred to the CRT.  There are many variations for the CRT which are beyond this short description, but it is something to consider if you intend to include charity as a major beneficiary of your estate.

Important:  If you are naming a charity make sure that the charity qualifies as a §501(c)(3) organization.  That designation will ensure that your charitable gift will not be subject to estate tax or income tax.  Many nonprofits such as service organizations (Kiwanis, Lions Club etc.) are not qualified as a §501(c)(3) but they may have a related foundation that is which can receive your gift.


Goodness is the only investment that never fails

     — Thoreau



What’s the worst mistake you can make with beneficiary designations? Naming your estate?  Naming nobody?  Actually, the worst mistake you can make is naming minors as beneficiaries.  Believe me, people do this; I know from several bad experiences (fortunately not my clients).  Usually this mistake is just based on a lack of understanding how beneficiary designations work as compared to a Will.  People assume that a Will, with all its fancy legal words and formality, will control all of their assets.  Wrong.  The Will only controls property that is subject to probate, basically property that is in your individual name and does not have a beneficiary designation.  Life insurance, retirement assets, and pay-on-death accounts all have beneficiary designations and those designations that you filled out while you where sitting on the couch watching American Idol — that is what controls in the distribution of those assets.

Now you are wondering why is it a problem for these assets to go to my children if both my spouse and I are gone, that is what I want.  If you have named a minor as beneficiary directly, then the options for long term management of the assets are very limited.  North Carolina law typically requires that a guardianship be created to handle management of the funds until the child reaches age eighteen.  At age eighteen the child will receive complete access to the funds; eighteen with money to burn!  Also, the guardianship requires someone to qualify as guardian and regularly account to the court.  The guardian will have to be bonded which can be surprisingly expensive depending on the circumstances.  All of this creates extra trouble and expense which will only reduce the assets ultimately available for the child.  Although North Carolina law does also provide for a custodianship for minors, which is a less formal type of guardianship; I have found that the custodianship is only available in very limited cases.

One of the main benefits of having a Will when you have minor children is that you can avoid all of this trouble by allowing for a hold back trust.  In this case the crucial step in any estate plan is to ensure that you have beneficiary designations which are consistent with your Will.  Generally your initial beneficiary would be your spouse and, for minor children, your contingent beneficiary would be the holdback trust that is created under your Will or under a separate trust document.  If you want to add  a minor grandchild as beneficiary, the same rules apply; so if you don’t have a trust set up for the grandchild talk to your advisor about other options.  Obviously, there are other matters that play into beneficiary choices such as income tax planning or creditor protection, but I encourage you to check your current life insurance, retirement assets, and other pay-on-death accounts to confirm exactly what beneficiary designations you have.  Details are pretty important in this line of work.