IF YOU HAVE MINOR CHILDREN AND HAVE NAMED YOUR PARENTS AS YOUR BENEFICIARIES…READ ON!
IF YOU HAVE MINOR CHILDREN AND HAVE NAMED YOUR PARENTS AS YOUR BENEFICIARIES…READ ON!
A new client told me she had named her parents as the beneficiaries of her 401(k) retirement plan.
As a single mother, she figured it was better to name her parents rather than her young children so that they could safeguard the funds until the boys turned 21.
While well-intentioned, naming a parent (or sibling, or other trusted adult) in a scenario like this is may not be the best idea. Those assets will legally belong to that adult, which comes with a whole host of risks, considerations, and unintended consequences. To name a few:
- Distributions from the retirement plan will be taxable and could push the parents into a higher tax bracket
- In the event of legal actions (divorce, a lawsuit), those assets will become the subject of their creditors or part of a settlement agreement
- Distributions to the children will likely be considered a gift and subject to additional tax reporting
- The assets might need to be spent down in order to qualify for assistance like Medicaid
Unfortunately, these are just a few of the ways conflicts can arise in the absence of proper planning. And the conflicts are not uncommon: an estimated 35% of adults have personally experienced family conflict or know someone who has as a result of not having a will or estate plan in place.
PSA: Estate planning is CRITICAL for parents and especially single parents with minor children. It doesn’t matter if you have a positive or even a negative net worth! Estate planning is about more than just distributing assets or minimizing taxes; for parents, these plans address who is going to raise your children, who will oversee the assets on their behalf, and what the parameters are for managing and distributing those assets.
I cannot emphasize enough how essential it is that you work with a competent ESTATE PLANNING ATTORNEY. Not your buddy from college who does corporate litigation, not your cousin who works for a law office specializing in real estate. A skilled estate planning attorney will ask the right questions and help craft a plan with your family at heart.
Once you have created your documents, it’s important to understand what follow up steps need to be taken. For example, you will likely need to update the beneficiary designations on your retirement accounts and life insurance policies. You may also need to reregister taxable accounts if you created living trusts. If you don’t properly address the follow-up items, your documents could be rendered ineffective. This is where your financial advisor can coordinate with your attorney to identify and help you execute those next steps.
Take a listen to the podcasts listed in this blog to get familiar with the documents you need and why you need them. If you have any questions or if we can be of help in any way, please let us know.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Karen Coyne and not necessarily those of Raymond James. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
