Beneficiaries

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bargainhuntingking
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Beneficiaries

Post by bargainhuntingking »

The recent Malaysian airliner tragedy over Ukraine once again pointed out how I need to get better organized in making sure that I have designated beneficiaries, etc, especially in light of the fact that I just had twins last year.

I am just curious how others divided up their assets between spouse and young children. I figure a 50% to my spouse and 25% to each child was roughly adequate to meet their child rearing needs and provide a buffer of saving for their college etc. My secondary beneficiaries would be my parents and siblings, divided equally. Is there anything wrong with not getting life insurance since I feel my retirement savings are adequate to provide for my family if I die unexpectedly?

Obviously I need to actually draw up a will and perhaps consider a trust to provide disbursement of funds to my children to 1) cover college expenses, 2) and later provide a the remainder of the nest egg at say, age 30, so they won't be given a lump sum at 18 which might be blown irresponsibly and spoil them without guidance or supervision (i.e. me not being around).

I'm just getting started with this process and am updating my beneficiaries on my bank and investment accounts.

I know there are websites out there like getyourshittogether.org which are helpful for this planning process.

Also, what happens to my 401k when it is dispersed to my beneficiaries? Is there an early withdrawal penalty? And how is it taxed (at the income rate of the beneficiary)?

I realize that I'm just scratching the surface here. Any thoughts or tips that I might not be considering? Thank you.
Gill
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Re: Beneficiaries

Post by Gill »

You don't need beneficiary designations. You need a comprehensive estate plan providing for your spouse and children.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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Aptenodytes
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Re: Beneficiaries

Post by Aptenodytes »

Why don't you trust your spouse to look after your kids should you die?
livesoft
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Re: Beneficiaries

Post by livesoft »

Spouse 100%
Kids: secondary split equally.

I would not make my siblings secondary beneficiaries. My parents are dead.

If you are self-insured in that if you die, there would be no financial changes to the lives of your spouse and kids, then I don't think you need life insurance. We have never bought life insurance for ourselves.

OTOH, I think your choice of beneficiaries is way out of the norm.
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Aptenodytes
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Re: Beneficiaries

Post by Aptenodytes »

If your parents depend on you for support, it is better to get life insurance and include them among the beneficiaries. I can't see a case for putting them in your will.

I don't quite understand the logic behind thinking you don't need life insurance. Maybe your portfolio is enough for your spouse and children to get by on, but is that all they deserve? Have you stopped working because you have enough to live on? If not, don't short-change them -- buy life insurance in case you leave them prematurely. What happens if your portfolio drops 30%? Is it still enough? Why leave these needs to chance? Why ignore your future earning potential when thinking about their well-being?

What happens to your children is relevant should you and your spouse die at the same time. If you have a family member you trust to look after them, then you probably don't need a trust -- designate the children as the secondary beneficiaries, and designate the family member as guardian. If there is no such person, you probably need a trust. Obviously this is something you need to revisit periodically.
sscritic
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Re: Beneficiaries

Post by sscritic »

Aptenodytes wrote:Why don't you trust your spouse to look after your kids should you die?
Looking after them doesn't mean she can't remarry and use the money she inherited on her new husband, his kids from a previous marriage, and the kids they will have together. Oh, and if anything is left over, a tuppence for the twins.

He could leave it in trust for the children with her as trustee with the right to withdraw what is needed for her own support and the support of the twins, and no one else.
Calm Man
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Re: Beneficiaries

Post by Calm Man »

sscritic wrote:
Aptenodytes wrote:Why don't you trust your spouse to look after your kids should you die?
Looking after them doesn't mean she can't remarry and use the money she inherited on her new husband, his kids from a previous marriage, and the kids they will have together. Oh, and if anything is left over, a tuppence for the twins.

He could leave it in trust for the children with her as trustee with the right to withdraw what is needed for her own support and the support of the twins, and no one else.
This. OP, it sounds like you are young. Hopefully you won't die young, but you could -- that is why you posted this thread. If you die, don't you think your lovely wife will remarry? I don't need to say anything else.
sscritic
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Re: Beneficiaries

Post by sscritic »

bargainhuntingking wrote: Also, what happens to my 401k when it is dispersed to my beneficiaries? Is there an early withdrawal penalty? And how is it taxed (at the income rate of the beneficiary)?
Search for inherited 401(k). The technical answer as I recall is that you can't; it gets rolled into an IRA. I think that there are special rules that allow the widow to make withdrawals without penalty before 59 1/2.
If you inherit a spouse’s 401k plan but you are not yet age 59 ½, consider the pros and cons of the following choices:

You can leave the money in the 401k plan. With this option you could take withdrawals as needed and the 10% penalty tax would not apply even if you have not yet reached age 59 1/2. You will still pay regular income tax on any amount withdrawn. (With this choice if your spouse was over age 70 ½, you will be required to continue the required minimum distributions.) The beneficiary designations set up by your spouse would continue to apply at your death.

You can roll the funds over to a specific type of account titled as an inherited IRA. As an inherited IRA you would take required distributions based on your single life expectancy table. If you desire you can take out more than this amount, but not less. With this option withdrawals would not be subject to the 10% penalty tax even if you are not yet 59 1/2. You would name your own beneficiaries with this option.

You can rollover the 401k plan to your own IRA account. There will be no taxes on this transaction. However, if you are not yet age 59 ½, you may not want to do this, because once it becomes your own IRA any distributions you take will be considered early distributions and subject to a 10% penalty tax as well as regular income taxes. You would name your own beneficiaries with this option.
I guess my recollection wasn't very good, at least in one aspect.
Alan S.
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Re: Beneficiaries

Post by Alan S. »

Gill wrote:You don't need beneficiary designations. You need a comprehensive estate plan providing for your spouse and children.
Gill
Comprehensive estate plan is good, but you will hopefully select your 401k beneficiary carefully. Leaving your 401k to your estate is generally a disaster. Here's why: http://www.morningstar.com/advisor/t/93 ... d-plan.htm
Topic Author
bargainhuntingking
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Re: Beneficiaries

Post by bargainhuntingking »

Aptenodytes, it isn't that I don't trust my wife, but what if we die in an accident together? Also, my thought was that my portfolio would provide adequately for the family until the children are self-reliant enough that my spouse can return to work.

Livesoft, in the event that our whole family dies in a car accident, I'd like my secondary beneficiaries to be my other (adult) family members (e.g parents and siblings). Why specifically do you say my "choice of beneficiaries is way out of the norm"?

Recently where I live there was a car accident at an intersection. A cargo van rolled onto a family of 5, killing both parents and 3 kids instantly. If my whole family goes, my relatives will be named as secondary beneficiaries. Otherwise, if we all die, what happens to my assets if I don't name other beneficiaries?

Calm Man, it sounds like you are suggesting leaving only the children as beneficiaries. My wife will need income while raising them, that is why she should be included. Whether she remarries is irrelevant, no?

SScritic and Alan S. thanks for the info on tax implications of an inherited 401k. I'll have to read about the tax implications more, or at least inform my beneficiaries to do so before deciding how they want to the funds to be dispersed.

I guess the concept that I'm struggling with is if I name my primary beneficiaries my wife 50% and the twin 25% each, then if my wife and I both die, do the twins get her 50% portion divided equally, or does my wife's 50% portion go to the secondary beneficiaries? I though that secondary beneficiaries only become involved when all of the primary beneficiaries are deceased.

Also, what ratio is a good one to divide between spouse and 2 kids? Perhaps 25% per kids is too much? I basically want to provide for college and perhaps a little left over for a house down payment, but not enough so that they become spoiled trustfunders and ne'er-do-wells. After all that 25% can accrue quite a bit over the next 18 years...
Bill M
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Re: Beneficiaries

Post by Bill M »

I think the most important thing you are missing is the appointment of a guardian for your twins. This will probably be 75% of the text of your will, naming the guardian and setting up the trust accounts until they turn 18 (or 30, or, until the youngest child turns 18) and appointing the trustee for the (testamentary) trust accounts.

As for the original question, picking beneficiaries, primary is 100% to wife, secondary is 100% divided equally among all children. You have to trust your wife (or the chosen guardian) to raise the kids when you can't. And, you don't want to list the names of the children as beneficiaries; if/when you have a third you'll have other things on your mind and probably won't remember to immediately update all the beneficiary lists.

One more thought-- you currently own a money-printing machine. It's printing money at a fairly good clip, and you're using that money for living expenses. If that machine breaks down, will it really have no impact on the lives of your family? (That money-printing machine, obviously, is you). I'd rethink the life insurance.
RobInCT
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Re: Beneficiaries

Post by RobInCT »

Bill M wrote:As for the original question, picking beneficiaries, primary is 100% to wife, secondary is 100% divided equally among all children. You have to trust your wife (or the chosen guardian) to raise the kids when you can't. And, you don't want to list the names of the children as beneficiaries; if/when you have a third you'll have other things on your mind and probably won't remember to immediately update all the beneficiary lists.
It's not about trust. I have a very responsible, very trustworthy family member whose wife died tragically young leaving him a single father of two children under the age of 5. He remarried several years later to a woman we all liked who had a child from a previous relationship, and they had one more child together. Fast-forward a number of years, and relative is suffering from a terminal disease that has also affected cognitive function. Second wife remains in good health. Use your imagination to fill in the blanks about what happens next.

Bottom line: if it's important to you that your children receive some money from your estate, leave it to them directly. If you want to guard against foolishness, you can leave it in trust until they're 30 with wife as trustee. It's not about trusting your wife. I'm sure if the worst came to pass she'd be grateful to you for doing her the favor of not having to negotiate such issues with a future spouse/second family. I know I would.
letsgobobby
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Re: Beneficiaries

Post by letsgobobby »

You keep saying you have enough to not need life insurance but that would be very unusual for a new parent. Are you sure? Does your sig other work?
sscritic
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Re: Beneficiaries

Post by sscritic »

RobInCT wrote: It's not about trusting your wife. I'm sure if the worst came to pass she'd be grateful to you for doing her the favor of not having to negotiate such issues with a future spouse/second family. I know I would.
I remarried after my wife's death. My second wife was a widow. Her assets were in a trust for her children. I kept my separate assets separate. For the most part, there was very little confusion as to which was which, as a result of which we didn't need to negotiate. What was hers was hers, what was mine was mine. Income after marriage was joint, but separate assets from before marriage were clearly separate.

The OP mentioned beneficiaries in general, but then raised the issue of the 401(k). Alan S. pointed to an article on the dangers of leaving your 401(k) to your estate, but I couldn't get to it without registering. I don't know if the same problems exist if the beneficiary is a trust. One way around this is to leave different assets to different beneficiaries. This would take regular reviews to keep the percentages current, but the OP could do something like leave the 401(k) to his wife and everything else to his children (this means no right of survivorship to his wife). Another alternative is to buy life insurance, but name the children as beneficiaries. Wife gets non-insurance estate, children get insurance proceeds.

I would use a revocable trust myself. Note that revocable becomes non-revocable at death (I simplified my second wife's example: her and her first husband's trust split at his death into two halves, one revocable and one not).

OP really needs a good estate planning attorney to discuss these issues with.
sscritic
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Re: Beneficiaries

Post by sscritic »

Maybe I missed it, but what does his wife think? Talk to her before you talk to an attorney.
letsgobobby
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Re: Beneficiaries

Post by letsgobobby »

We also have young children and this is what we have done (brief outline).

Approximately 1/2 of our estate is left to the surviving spouse in trust, from which he/she can withdraw earnings at will, or principle with the blessing of a corporate co-trustee. Upon surviving spouse's death, our children become successor co-trustees (if that's the right term) if they are at least 31 years old, otherwise the corporate co-trustee is the sole trustee and the under-31 children are only beneficiaries and can only receive distributions of principle with the blessing of the corporate trustee.

The other 1/2 is left in trust to the children. As above they would receive the income and could request distributions of principle with the approval of the corporate trustee. When they turn 31 they become co-trustees.

If both of us die simultaneously of course everything flows to the trust for the children.

If all of us die in said rollover accident, the estate is divided between charities and siblings. My parents don't need our money; her parents could benefit from it but by leaving to her siblings they will be well taken care of.

We have named guardians, alternates, etc. None of them are listed as trustees to prevent conflicts of interest.

We are using a corporate co-trustee despite the added cost to help protect the trust assets against remarriage of the spouse, marriage/remarriage of the children, and creditors.

By the way, we are pretty well off and have life insurance - tons of it in fact. I'm still working and not for the joy of it so that means my family still needs my income. If my wife dies I have to hire help around the house and to provide childcare and to help chauffeur the kids and I lose her (more modest) income, all of which adds up to a pretty penny, so she has life insurance, too.

Hope this helps.
smackboy1
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Re: Beneficiaries

Post by smackboy1 »

sscritic wrote:OP really needs a good estate planning attorney to discuss these issues with.
Ding! That is the #1 best answer!

Just as it would make no sense to walk into a doctor's office and ask for a triple bypass, it makes little sense to come up with an estate plan before talking to an experienced estates and trust lawyer. OP + Mrs. OP should write down their "wish list" along with concerns and issues and let the professional come up with possible solution options.
bargainhuntingking wrote:Otherwise, if we all die, what happens to my assets if I don't name other beneficiaries?
. . .
Also, what ratio is a good one to divide between spouse and 2 kids? Perhaps 25% per kids is too much? I basically want to provide for college and perhaps a little left over for a house down payment, but not enough so that they become spoiled trustfunders and ne'er-do-wells. After all that 25% can accrue quite a bit over the next 18 years...
Don't worry, for those that die without a will, the state has one for you - the intestacy statute. Sort of one size fits most. But as long as answer #1 is followed, a good estate plan always has succession spelled out in the unlikely event of intended heirs predeceasing or disclaiming. It might be specific named persons, or maybe a class of relatives. In the unlikely event of zero living close or distant relatives, a saving clause can name a charity or non-profit as the heir of last resort.

There is no "magic ratio". Parents raise children. Trusts and inheritances are just $$$. If both parents were alive they would probably not assign fixed % to each child or to themselves. It's based on need and circumstances e.g. if a child needed medical care the parents would just pay for it. It wouldn't come out of that child's 25% allotment. It may make more sense to keep the assets held in 1 big trust and name the surviving spouse and all children as beneficiaries so they can all benefit as needed. Perhaps at some future date, after both parents are dead, and when the children become responsible adults, there can be an option for the trust to be split so each child has its own trust.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.
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Aptenodytes
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Re: Beneficiaries

Post by Aptenodytes »

RobInCT wrote:
Bill M wrote:As for the original question, picking beneficiaries, primary is 100% to wife, secondary is 100% divided equally among all children. You have to trust your wife (or the chosen guardian) to raise the kids when you can't. And, you don't want to list the names of the children as beneficiaries; if/when you have a third you'll have other things on your mind and probably won't remember to immediately update all the beneficiary lists.
It's not about trust. I have a very responsible, very trustworthy family member whose wife died tragically young leaving him a single father of two children under the age of 5. He remarried several years later to a woman we all liked who had a child from a previous relationship, and they had one more child together. Fast-forward a number of years, and relative is suffering from a terminal disease that has also affected cognitive function. Second wife remains in good health. Use your imagination to fill in the blanks about what happens next.

Bottom line: if it's important to you that your children receive some money from your estate, leave it to them directly. If you want to guard against foolishness, you can leave it in trust until they're 30 with wife as trustee. It's not about trusting your wife. I'm sure if the worst came to pass she'd be grateful to you for doing her the favor of not having to negotiate such issues with a future spouse/second family. I know I would.
Even recognizing this possibility, I wouldn't use a trust, and I'd still leave 100% to my wife. Well, that's what I've done in fact. The scenario laid out above is one that could have been dealt with with a prenup. The surviving spouse has some responsibility to his/her children.

You asked me to use my imagination to fill in the blanks about what happens next, but my imagination told me that everything worked out fine.
letsgobobby
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Re: Beneficiaries

Post by letsgobobby »

Your imagination hasn't read Condon and Condon.

http://www.amazon.com/Beyond-Grave-revi ... 0060936312
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Aptenodytes
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Re: Beneficiaries

Post by Aptenodytes »

letsgobobby wrote:Your imagination hasn't read Condon and Condon.

http://www.amazon.com/Beyond-Grave-revi ... 0060936312
That's a different matter. I worry about my children, not my wife. My wife is sole beneficiary of everything. She'll be more diligent about meeting our children's best needs than I probably would be, regardless of whether or not she remarries. When we are both gone, the estate will pass to a trust to take care of all those nightmare scenarios our imaginations quite easily conjure.
letsgobobby
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Re: Beneficiaries

Post by letsgobobby »

If you worry about your children then you should not leave everything to your wife. Creditors, including her future spouses, may lay claim to those assets you anticipate would go to your surviving children.

Condon and Condon can be read as cautionary tale, campfire ghost story, or marketing schtick. Regardless, it's pretty entertaining and in my opinion those having assets of any size to leave should read it.
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Aptenodytes
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Re: Beneficiaries

Post by Aptenodytes »

letsgobobby wrote:If you worry about your children then you should not leave everything to your wife. Creditors, including her future spouses, may lay claim to those assets you anticipate would go to your surviving children.

Condon and Condon can be read as cautionary tale, campfire ghost story, or marketing schtick. Regardless, it's pretty entertaining and in my opinion those having assets of any size to leave should read it.
I understand the impulse to act as you suggest, and I'll probably back off my categorical advice not to ever do it, but it just doesn't fit my situation. My wife and I share joint responsibility for our children's well-being, and if one of us dies the remaining partner takes on sole responsibility. If I go first, my wife will have to fend off the risks you warn about, and I trust her to do so effectively. She doesn't need me looking over her shoulder from beyond the grave. And if I did try to meddle posthumously I could end up making it worse.

I see things quite differently with my children. Not wanting to get into too many specifics, lets just say I don't have the same level of trust with all of them, and the nature of the social contract is clearly different with them than my wife. So for them I'm quite comfortable erecting all kinds of barriers to bad outcomes.
livesoft
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Re: Beneficiaries

Post by livesoft »

Thanks goodness I don't worry about my children or my spouse.

But do they worry about me?
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letsgobobby
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Re: Beneficiaries

Post by letsgobobby »

aptenodytes, as you say each situation is unique and of course you know yours best. I would only encourage everyone to think about these issues not as a matter of trust, but as a matter of risk. I also trust my wife 110%; however, even trustworthy people get into difficult straits sometimes, and often for perfectly good reasons, and at the end of the day (per the social contract you describe) by primary obligation is to my minor children - whereas my wife is an adult who can work, make her own choices, etc. If I trust my wife 110% and then she kills someone in a car wreck through a terrible accident, her assets become vulnerable, and we cannot take that risk for our children.

Good discussion.
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