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Transferring Your Family Business

Transferring Your Family Business

As a business owner, you’re going to have to decide when will be the right time to step out of the family business and how you’ll do it. There are many estate planning tools you can use to transfer your business. Selecting the right one will depend on whether you plan to retire from the business or keep it until you die.

Perhaps you have children or other family members who wish to continue the business after your death. Obviously, you’ll want to transfer your business to your successors at its full value. However, with income, gift, and potential estate taxes, it takes careful planning to prevent some (or all) of the business assets from being sold to pay them, perhaps leaving little for your beneficiaries. Therefore, business succession planning must include ways not only to ensure the continuity of your business, but also to do so with the smallest possible tax consequences.

Some of the more common strategies for minimizing taxes are explained briefly in the following sections. Remember, none are without drawbacks. You’ll want to consult a tax professional as well as your estate planning attorney to explore all strategies.

You and your estate may get some relief under the Internal Revenue Code

If you are prepared to begin transferring some of your business interest to your beneficiaries, a systematic gifting program can help accomplish this while minimizing the gift tax liability that might otherwise be incurred. In 2013, you can give up to $14,000 ($13,000 in 2012) per year per recipient without incurring gift tax. By transferring portions of your business in this manner, over time you may manage to transfer a significant portion of your business free from gift tax. Clearly, the disadvantage of relying solely on this method of transferring your business is the amount of time necessary to complete the transfer of your entire estate.

In addition, Section 6166 of the Internal Revenue Code allows any estate taxes incurred because of the inclusion of a closely held business in your estate to be deferred for 5 years (with interest-only payments for the first four years), and then paid in annual installments over a period of up to 10 years. Installment payments include both principal and interest. This allows your beneficiaries more time to raise sufficient funds or obtain more favorable interest rates. The business must exceed 35 percent of your gross estate and must meet other requirements to qualify.

Selling your business interest outright

When you sell your business interest to a family member or someone else, you receive cash (or assets you can convert to cash) that can be used to maintain your lifestyle or pay your estate taxes. You choose when to sell–now, at your retirement, at your death, or anytime in between. As long as the sale is for the full fair market value (FMV) of the business, it is not subject to gift tax or estate tax. But if the sale occurs before your death, it may be subject to capital gains tax.

Transferring your business interest with a buy-sell agreement

A buy-sell agreement is a legal contract that prearranges the sale of your business interest between you and a willing buyer.

A buy-sell agreement lets you keep control of your interest until the occurrence of an event that the agreement specifies, such as your retirement, disability, or death. Other events like divorce can also be included as triggering events under a buy-sell agreement. When the triggering event occurs, the buyer is obligated to buy your interest from you or your estate at the FMV. The buyer can be a person, a group (such as co-owners), or the business itself. Price and sale terms are prearranged, which eliminates the need for a fire sale if you become ill or when you die.

Remember, you are bound under a buy-sell agreement: You can’t sell or give your business to anyone except the buyer named in the agreement without the buyer’s consent. This could restrict your ability to reduce the size of your estate through lifetime gifts of your business interest, unless you carefully coordinate your estate planning goals with the terms of your buy-sell agreement.

Grantor retained annuity trusts or grantor retained unitrusts

A more sophisticated business succession tool is a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT). GRAT/GRUTs are irrevocable trusts to which you transfer appreciating assets while retaining an annuity or unitrust payment for a set period of time. In general, an annuity means you receive fixed periodic payments, while a unitrust means you receive payments of a fixed percentage of trust assets (revalued annually). At either the end of the payment period or your death, the assets in the trust pass to the other trust beneficiaries (the remainder beneficiaries). The value of the retained annuity or unitrust interest is subtracted from the value of the property transferred to the trust (i.e., a share of the business), so if you live beyond the specified payment period, the business may be ultimately transferred to the next generation at a reduced value for estate tax or gift tax purposes.

Private annuities

A private annuity is the sale of property in exchange for a promise to make payments to you for the rest of your life. Here, you transfer complete ownership of the business to family members or another party (the buyer). The buyer in turn makes an unsecured promise to make periodic payments to you for the rest of your life (a single life annuity) or for your life and the life of a second person (a joint and survivor annuity). A joint and survivor annuity provides payments until the death of the last survivor; that is, payments continue as long as either the husband or wife is still alive. Again, because a private annuity is a sale and not a gift, it allows you to remove assets from your estate without incurring gift tax or estate tax.

Until recently, exchanging property for an unsecured private annuity allowed you to spread out any capital gain realized, deferring capital gains tax. However, this tax benefit has generally been eliminated. If you’re considering a private annuity, be sure to talk to a tax professional.

Self-canceling installment notes

A self-canceling installment note (SCIN) allows you to transfer the business to the buyer in exchange for a promissory note. The buyer must make a series of payments to you under that note. A provision in the note states that at your death, the remaining payments will be canceled. SCINs provide for a lifetime income stream and avoidance of gift tax and estate tax similar to private annuities. Unlike private annuities, SCINs give you a security interest in the transferred business.

Family limited partnerships

A family limited partnership can also assist in transferring your business interest to family members. First, you establish a partnership with both general and limited partnership interests. Then, you transfer the business to this partnership. You retain the general partnership interest for yourself, allowing you to maintain control over the day-to-day operation of the business. Over time, you gift the limited partnership interest to family members. The value of the gifts may be eligible for valuation discounts as a minority interest and for lack of marketability. If so, you may successfully transfer much of your business to your heirs at significant transfer tax savings.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions

Asset Protection in Estate Planning

Asset Protection in Estate Planning

You’re beginning to accumulate substantial wealth, but you worry about protecting it from future potential creditors. Whether your concern is for your personal assets or your business, various tools exist to keep your property safe from tax collectors, accident victims, health-care providers, credit card issuers, business creditors, and creditors of others.

To insulate your property from such claims, you’ll have to evaluate each tool in terms of your own situation. You may decide that insurance and a Declaration of Homestead may be sufficient protection for your home because your exposure to a claim is low. For high exposure, you may want to create a business entity or an offshore trust to shield your assets. Remember, no asset protection tool is guaranteed to work, and you may have to adjust your asset protection strategies as your situation or the laws change.

Liability insurance is your first and best line of defense

Liability insurance is at the top of any plan for asset protection. You should consider purchasing or increasing umbrella coverage on your homeowners policy. For business-related liability, purchase or increase your liability coverage under your business insurance policy. Generally, the cost of the premiums for this type of coverage is minimal compared to what you might be required to pay under a court judgment should you ever be sued.

A Declaration of Homestead protects the family residence

Your primary residence may be your most significant asset. State law determines the creditor and judgment protection afforded a residence by way of a Declaration of Homestead, which varies greatly from state to state. For example, a state may provide a complete exemption for a residence (i.e., its entire value), a limited exemption (e.g., up to $100,000), or an exemption under certain circumstances (e.g., a judgment for medical bills). A Declaration of Homestead is easy to file. You pay a small fee, fill out a simple form, and file it at the registry where your deed is recorded.

Dividing assets between spouses can limit exposure to potential liability

Perhaps you work in an occupation or business that exposes you to greater potential liability than your spouse’s job does. If so, it may be a good idea to divide assets between you so that you keep only the income and assets from your job, while your spouse takes sole ownership of your investments and other valuable assets. Generally, your creditors can reach only those assets that are in your name.

Business entities can provide two types of protection–shielding your personal assets from your business creditors and shielding business assets from your personal creditors

Consider using a corporation, limited partnership, or limited liability company (LLC) to operate the business. Such business entities shield the personal assets of the shareholders, limited partners, or LLC members from liabilities that arise from the business. The liability of these owners will be limited to the assets of the business.

Conversely, corporations, limited partnerships, and LLCs provide some protection from the personal creditors of a shareholder, limited partner, or member. In a corporation, a creditor of an individual owner is able to place a lien on, and eventually acquire, the shares of the debtor/shareholder, but would not have any rights greater than the rights conferred by the shares. In limited partnerships or LLCs, under most state laws, a creditor of a partner or member is entitled to obtain only a charging order with respect to the partner or member’s interest. The charging order gives the creditor the right to receive any distributions with respect to the interest. In all respects, the creditor is treated as a mere assignee and is not entitled to exercise any voting rights or other rights that the partner or member possessed.

Certain trusts can preserve trust assets from claims

People have used trusts to protect their assets for generations. The key to using a trust as an asset protection tool is that the trust must be irrevocable and become the owner of your property. Once given away, these assets are no longer yours and are not available to satisfy claims against you. To properly establish an asset protection trust, you must not keep any interest in the trust assets or control over the trust.

Trusts can also protect trust assets from potential creditors of the beneficiaries of the trust. The extent to which a beneficiary’s creditors can reach trust property depends on how much access the beneficiary has to the trust property. The more access the beneficiary has to the trust property, the more access the beneficiary’s creditors will have. Thus, the terms of the trust are critical.

There are many types of asset protection trusts, each having its own benefits and drawbacks. These trusts include:

  • Spendthrift trusts
  • Discretionary trusts
  • Support trusts
  • Blend trusts
  • Personal trusts
  • Self-settled trusts

Since certain claims can pierce domestic protective trusts (e.g., claims by a spouse or child for support and state or federal claims), you can bolster your protection by placing the trust in a foreign jurisdiction. Offshore or foreign trusts are established under, or made subject to, the laws of another country (e.g., the Bahamas, the Cayman Islands, Bermuda, Belize, Jersey, Liechtenstein, and the Cook Islands) that does not generally honor judgments made in the United States.

A word about fraudulent transfers

The court will ignore transfers to an asset protection trust if:

  • A creditor’s claim arose before you made the transfer
  • You made the transfer with the intent to defraud a creditor
  • You incurred debts without a reasonable expectation of paying them

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Choosing a Beneficiary for Your IRA or 401(k)

Choosing a Beneficiary for Your IRA or 401(k)

Selecting beneficiaries for retirement benefits is different from choosing beneficiaries for other assets such as life insurance. With retirement benefits, you need to know the impact of income tax and estate tax laws in order to select the right beneficiaries. Although taxes shouldn’t be the sole determining factor in naming your beneficiaries, ignoring the impact of taxes could lead you to make an incorrect choice.

In addition, if you’re married, beneficiary designations may affect the size of minimum required distributions to you from your IRAs and retirement plans while you’re alive.

Paying income tax on most retirement distributions

Most inherited assets such as bank accounts, stocks, and real estate pass to your beneficiaries without income tax being due. However, that’s not usually the case with 401(k) plans and IRAs.

Beneficiaries pay ordinary income tax on distributions from 401(k) plans and traditional IRAs. With Roth IRAs and Roth 401(k)s your beneficiaries can receive the benefits free from income tax if all of the tax requirements are met. That means you need to consider the impact of income taxes when designating beneficiaries for your 401(k) and IRA assets.

For example, if one of your children inherits $100,000 cash from you and another child receives your 401(k) account worth $100,000, they aren’t receiving the same amount. The reason is that all distributions from the 401(k) plan will be subject to income tax at ordinary income tax rates, while the cash isn’t subject to income tax when it passes to your child upon your death.

Similarly, if one of your children inherits your taxable traditional IRA and another child receives your income-tax-free Roth IRA, the bottom line is different for each of them.

Naming or changing beneficiaries

When you open up an IRA or begin participating in a 401(k), you are given a form to complete in order to name your beneficiaries. Changes are made in the same way–you complete a new beneficiary designation form. A will or trust does not override your beneficiary designation form. However, spouses may have special rights under federal or state law.

It’s a good idea to review your beneficiary designation form at least every two to three years. Also, be sure to update your form to reflect changes in financial circumstances. Beneficiary designations are important estate planning documents. Seek legal advice as needed.

Designating primary and secondary beneficiaries

When it comes to beneficiary designation forms, you want to avoid gaps. If you don’t have a named beneficiary who survives you, your estate may end up as the beneficiary, which is not always the best result.

Your primary beneficiary is your first choice to receive retirement benefits. You can name more than one person or entity as your primary beneficiary. If your primary beneficiary doesn’t survive you or decides to decline the benefits (the tax term for this is a disclaimer), then your secondary (or “contingent”) beneficiaries receive the benefits.

Having multiple beneficiaries

You can name more than one beneficiary to share in the proceeds. You just need to specify the percentage each beneficiary will receive. Also, you should state who will receive the proceeds should a beneficiary not survive you.

In some cases, you’ll want to designate a different beneficiary for each account or have one account divided into sub-accounts. You’d do this to allow each beneficiary to use his or her own life expectancy in calculating required distributions after your death. This, in turn, can permit greater tax deferral (delay) and flexibility for your beneficiaries in paying income tax on distributions.

Avoiding gaps or naming your estate as a beneficiary

There are two ways your retirement benefits could end up in your probate estate. Probate is the court process by which assets are transferred from someone who has died to the heirs or beneficiaries entitled to those assets.

First, you might name your estate as the beneficiary. Second, if no named beneficiary survives you, your probate estate may end up as the beneficiary by default. If your probate estate is your beneficiary, several problems can arise.

If your estate receives your retirement benefits, the opportunity to maximize tax deferral by spreading out distributions may be lost. In addition, probate can mean paying attorney’s and executor’s fees and delaying the distribution of benefits.

Naming your spouse as a beneficiary

When it comes to taxes, your spouse is usually the best choice for a primary beneficiary.

A spousal beneficiary has the greatest flexibility for delaying distributions that are subject to income tax. In addition to rolling over your 401(k) or IRA to his or her IRA, a surviving spouse can decide to treat your IRA as his or her own IRA. This can provide more tax and planning options.

If your spouse is more than 10 years younger than you, then naming your spouse can also reduce the size of any required taxable distributions to you from retirement assets while you’re alive. This can allow more assets to stay in the retirement account longer and delay the payment of income tax on distributions.

Although naming a surviving spouse can produce the best income tax result, that isn’t necessarily the case with death taxes. One possible downside to naming your spouse as the primary beneficiary is that it will increase the size of your spouse’s estate for death tax purposes. This is because at your death, your spouse can inherit an unlimited amount of assets and defer federal death tax until both of you are deceased. However, this may result in death tax or increased death tax when your spouse dies.

If your spouse’s taxable estate for federal tax purposes at his or her death exceeds the applicable exclusion amount , then federal death tax may be due at his or her death.

Naming other individuals as beneficiaries

You may have some limits on choosing beneficiaries other than your spouse. No matter where you live, federal law dictates that your surviving spouse be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a timely, effective written waiver. As well, if you live in one of the community property states, your spouse may have rights related to your IRA regardless of whether he or she is named as the primary beneficiary.

Keep in mind that a nonspouse beneficiary cannot roll over your 401(k) or IRA to his or her own IRA. However, a nonspouse beneficiary may be able to roll over all or part of your 401(k) benefits to an inherited IRA.

Naming a trust as a beneficiary

You must follow special tax rules when naming a trust as a beneficiary, and there may be income tax complications. Seek legal advice before designating a trust as a beneficiary.

Naming a charity as a beneficiary

In general, naming a charity as the primary beneficiary will not affect required distributions to you during your lifetime. However, after your death, having a charity named with other beneficiaries on the same asset could affect the tax-deferral possibilities of the noncharitable beneficiaries, depending on how soon after your death the charity receives its share of the benefits.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Estate Planning and 529 Plans

Estate Planning and 529 Plans

When you contribute to a 529 plan, you’ll not only help your child, grandchild, or other loved one pay for college, but you’ll also remove money from your taxable estate. This will help you minimize your tax liability and preserve more of your estate for your loved ones after you die. So, if you’re thinking about contributing money to a 529 plan, it pays to understand the gift and estate tax rules.

Overview of gift and estate tax rules

If you give away money or property during your life, you may be subject to federal gift tax. These transfers may also be subject to tax at the state level.

Federal gift tax generally applies if you give someone more than the annual gift tax exclusion amount. Currently, $14,000, during the tax year. There are several exceptions, though, including gifts you make to your spouse. That means you can give up to $15,000 each year, to as many individuals as you like, federal gift tax free.

Contributions to a 529 plan are treated as (federal) gifts to the beneficiary

A contribution to a 529 plan is treated under the federal gift tax rules as a completed gift from the donor to the designated beneficiary of the account. Such contributions are considered present interest gifts and qualify for the annual federal gift tax exclusion. This means that you can contribute up to $15,000 per year to the 529 account of any beneficiary without incurring federal gift tax.

So, if you contribute $16,000 to your daughter’s 529 plan in a given year, you’d ordinarily apply this gift against your $15,000 annual gift tax exclusion. This means that although you’d need to report the entire $16,000 gift on a federal gift tax return, you’d show that only $1,000 is taxable. Bear in mind, though, that you must use up your federal applicable exclusion amount ( $11,700,000 in 2021) before you’d actually have to write a check for the gift tax.

Special rule if you contribute over $14,000 in a year

Section 529 plans offer a special gifting feature. Specifically, you can make a lump-sum contribution to a 529 plan of up to $70,000, elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. A married couple can gift up to $140,000.

If you contribute more than $75,000 ($140,000 for joint gifts) to a particular beneficiary’s 529 plan in one year, the averaging election applies only to the first $75,000 ($150,000 for joint gifts). The remainder is treated as a gift in the year the contribution is made.

What about gifts from a grandparent?

Grandparents need to keep the federal generation-skipping transfer tax (GSTT) in mind when contributing to a grandchild’s 529 account. The GSTT is a tax on transfers made during your life and at your death to someone who is more than one generation below you. This would be someone like a grandchild. The GSTT is imposed in addition to (not instead of) federal gift and estate taxes. Like the basic gift tax exclusion amount, though, there is a GSTT exemption (also 11,580,000 in 2020). No GSTT will be due until you’ve used up your GSTT exemption, and no gift tax will be due until you’ve used up your applicable exclusion amount.

If you contribute no more than $15,000 to your grandchild’s 529 account during the tax year, there will be no federal tax consequences. Your gift qualifies for the annual federal gift tax exclusion, and it is also excluded for purposes of the GSTT.

If you contribute more than $15,000, you can elect to treat your contribution as if made evenly over a five-year period. Only the portion that causes a federal gift tax will also result in a GSTT.

What if the owner of a 529 account dies?

If the owner of a 529 account dies, the value of the 529 account will not usually be included in his or her estate. Instead, the value of the account will be included in the estate of the designated beneficiary of the 529 account.

There is an exception, though. It would be if you made the five-year election and died before the five-year period ended. In this case, the portion of the contribution allocated to the years after your death would be included in your federal gross estate.

Some states have an estate tax like the federal estate tax; many states calculate estate taxes differently. Review the rules in your state so you know how your 529 account will be taxed at your death.

When the account owner dies, the terms of the 529 plan will control who becomes the new account owner. Some states permit the account owner to name a contingent account owner. They would assume all rights if the original account owner dies. In other states, account ownership may pass to the designated beneficiary. Alternatively, the account may be considered part of the account owner’s probate estate and may pass according to a will. Or through the state’s intestacy laws if there is no will.

What if the beneficiary of a 529 account dies?

If the designated beneficiary of your 529 account dies, look to the rules of your plan for control issues. Generally, the account owner retains control of the account. The account owner may be able to name a new beneficiary or else make a withdrawal from the account. The earnings portion of the withdrawal would be taxable, but you won’t be charged a penalty for terminating an account upon the death of your beneficiary.

Keep in mind that if the beneficiary dies with a 529 balance, the balance may be included in the beneficiary’s taxable estate.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Life Insurance and Estate Planning

Life Insurance and Estate Planning

Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. You can use it to leave much-needed income to your survivors. Or, provide for your children’s education, or pay off your mortgage. It can simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death. Or, it can be used to make gifts to charity at relatively little cost to you.

We will illustrate how life insurance can help you plan your estate wisely. Let’s compare what happened upon the death of two friends. Frank, who bought life insurance, and Dave, who did not.

(Please note: that these illustrations are hypothetical)

Life insurance can protect your survivors financially by replacing your lost income

Frank bought life insurance to help ensure that his survivors wouldn’t suffer financially when he died. When Frank died and his paycheck stopped coming in, his family had enough money to maintain their lifestyle and live comfortably for years to come.

And since Frank’s life insurance proceeds were available very quickly, his family had cash to meet their short-term financial needs. Life insurance proceeds left to a named beneficiary don’t pass through the process of probate. Thus, Frank’s family didn’t have to wait until his estate was settled to get the money they needed to pay bills.

But Dave didn’t buy life insurance, so his family wasn’t so lucky. Even though Dave left his assets to his family in his will, those assets couldn’t be distributed until after the probate of his estate was complete. Probate typically takes six months or longer. Dave’s survivors had none of the financial flexibility that a life insurance policy would have provided in the difficult time following his death.

Life insurance can replace wealth that is lost due to expenses and taxes

Frank planned ahead and bought enough life insurance to cover the potential costs of settling his estate. Including taxes, fees, and other debts that his estate would have to pay. By comparison, these expenses took a big bite out of Dave’s estate. His estate had to sell valuable assets to pay the taxes and expenses that arose as a result of his death.

Life insurance lets you give to charity, while your estate enjoys an estate tax deduction

Using life insurance, Frank was able to leave a substantial gift to his favorite charity. Since gifts to charity are estate tax deductible, this gift was not subject to estate taxes when he died. Dave always dreamed of leaving money to his alma mater. However, his family couldn’t afford to give any money away when he died.

Life insurance won’t increase estate taxes–if you plan ahead

Before buying life insurance, Frank talked to his attorney about the potential tax consequences. Frank’s attorney told him that if he was leaving behind a taxable estate worth less than a certain amount, his survivors generally wouldn’t owe estate taxes on a life insurance policy left to them. Frank’s estate was larger than that. Frank and his attorney put a plan in place that helped minimize the estate tax burden on his family.

Be like Frank, not like Dave

Throughout his life, Dave worked hard to support his family. Frank did, too, but went one step further–he bought life insurance to protect his family after his death. Here’s how you can be like Frank:

  • Use life insurance to ensure that your family has access to cash to help them meet both their short-term and long-term financial needs
  • Plan ahead–buy enough life insurance to cover the potential costs of settling your estate and to ensure that the assets you leave to your survivors aren’t less than you intended
  • Consider using life insurance to give to charity
  • Consult an experienced attorney about income and estate tax consequences before purchasing life insurance

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Designating a Beneficiary for Life Insurance

Designating a Beneficiary for Life Insurance

A beneficiary is the person or entity you name (i.e., designate) to receive the death benefits of a life insurance policy. Some states require that your beneficiary have an insurable interest in your life or be related to you, while others have no such restriction.

If you do not want to name an individual or entity as your beneficiary, you can name your own estate. Any proceeds are distributed with your other assets according to your will. Please note, naming your estate as beneficiary may have disadvantages. For example, in many states, life insurance proceeds are exempt from the claims of your creditors when there is a named beneficiary, but not when your estate is your named beneficiary.

Revocable and irrevocable beneficiaries

The beneficiary can be either revocable or irrevocable. A revocable beneficiary can be changed at any time. Once named, an irrevocable beneficiary cannot be changed without his or her consent.

Primary and contingent beneficiaries

You may name multiple beneficiaries if you choose. There are no legal restrictions (and few company restrictions) on the number of beneficiaries you can designate.

You can name as many beneficiaries as you want, subject to procedures set in the policy. The beneficiary to whom the proceeds go first is called the primary beneficiary. Secondary or contingent beneficiaries are entitled to the proceeds only if they survive both you and the primary beneficiary. It’s important to name a contingent beneficiary. If you and your primary beneficiary die simultaneously, the Uniform Simultaneous Death Act provides that the beneficiary will be presumed to have died first. Naming a contingent beneficiary avoids having the proceeds flow to your estate.

Multiple beneficiaries

If you name multiple beneficiaries, you must also specify how much each beneficiary will receive. You may not want to give each beneficiary an equal share, so you must state how the proceeds should be divided. Because of the numerous interest and dividend adjustments that the insurance company must make, the death benefit check often does not equal the policy’s face value. It’s wise to distribute percentage shares to your beneficiaries, or to designate one beneficiary to receive any leftover balance.

How do you name or change a beneficiary?

When you buy life insurance, you will indicate your beneficiaries on the application. When changing a beneficiary, the insurer will provide you with a beneficiary designation form. Unless one or more of the beneficiaries is irrevocable, you only need to list the names of the beneficiaries, sign the form, and date it. This will automatically revoke any previous designations by writing this in on the change-of-beneficiary form. Be sure to check and update your beneficiary designations upon certain life events.

Don’t make the mistake of thinking that you can change your beneficiary in your will. A change of beneficiary made in your will does not override the beneficiary designation of your life insurance policy. If you want to change the beneficiary of your life insurance, execute a change-of-beneficiary form. Do not rely on your will to do so.

Why designating the proper beneficiary is important

You should name both primary and contingent beneficiaries. If you have not named one or more beneficiaries, the proceeds pass to your estate at your death. Proceeds paid to your estate are subject to probate and will incur all of the expenses and delays associated with settling an estate. Named beneficiaries receive proceeds almost immediately after your death, and probate is bypassed. In addition, proceeds passing to your estate are subject to the claims of creditors. Most states exempt life insurance proceeds from creditors when there’s a named beneficiary.

Other considerations when designating beneficiaries

If you become incompetent, you cannot name or change a beneficiary. You’re incompetent only if you are legally declared to be so. The test is similar to the test regarding the making of wills or any other legal contract.

Do not name a minor as a beneficiary unless you also appoint a guardian in your will or use a trust. If you do name a minor as a beneficiary, and you do not appoint a guardian or use a trust, the probate court will appoint a guardian for you. In states that have adopted the Uniform Transfers to Minors Act, it’s possible to create a custodial account of the minor after the death of the insured to receive the child’s share of the death proceeds.

Your right to change a beneficiary may be limited by a divorce decree or settlement agreement. In some cases, divorce allows a policyowner to change the beneficiary, even if the beneficiary is irrevocable. In other cases, the policyowner may be prohibited from changing the beneficiary. Or, may be required to name a divorced spouse or children as irrevocable beneficiaries.

If you’re a minor

In some states, if you (the insured) are a minor, you can name only a certain class of persons as beneficiaries. That class generally includes your spouse, parents, grandparents, and brothers or sisters. Your parents or legal guardians will also have to sign the application for life insurance.

At Sterling Group, We Empower You to Protect Yourself

We offer a a diverse suite of life insurance carriers that fit you and your specific needs. We can also help you select the best choice as to who will be designated as your beneficiary to your life insurance policy. Contact us today for your complimentary consultation!