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Company Benefit Plan Designations Can Lead To A Huge Estate Planning Blunder

This article is more than 4 years old.

When you showed up for the first day of your new job, most likely you visited with Human Resources where you were handed a huge stack of forms to fill out. You needed to sign off that you were informed of and understood a multitude of corporate policies and received the company handbook. You probably took a guess at how many exemptions to claim for purposes of payroll tax withholding (to be adjusted later, of course); completed Form I-9 affirming your eligibility to work; perhaps selected a medical plan; and named beneficiaries for the various employee plans. Depending on where you work, those plans, the ones for which you named beneficiaries, may include life insurance programs, capital accumulation plans such as stock options, restricted stock, stock purchase plans, and your company’s 401(k) plan. All that paperwork makes for a busy morning indeed!

Now let’s segue to a seemingly unrelated aspect of life — the day you met with your attorney to sign your estate documents. After several meetings and perhaps a working draft or two, and difficult decisions as to the least-bad choice of potential guardians for your kids as well as other decisions, you leave with a copy of your last will and testament.  You’re probably feeling pretty good that this rite of responsible adulthood can be checked off life’s To Do list.

Upon passing, your will outlines who gets what, when, and how (outright or in trust). Your named executor will submit the will to the proper court which determines its legitimacy and oversees the distribution of assets, a process called probate. However, not all of your assets are controlled by your will.

Assets that have a form of joint or survivor ownership, or have named beneficiaries, pass on to heirs as a function of law, and are not part of your probated estate. Typically, this form of asset transfer applies to homes, bank and investment accounts, life insurance, retirement plans, and corporate asset accumulation plans — those plans for which you designated beneficiaries, and probably haven’t changed since your first day of work.

Think back to that first day on the job. If you’re like most people, you probably named your spouse as your primary beneficiary, and if you named a contingency beneficiary, it probably was your children. This might be consistent with naming your spouse as the primary beneficiary of your estate in your will, but maybe not. The secondary designation is probably not something you gave much thought but consider that in the event that your spouse predeceases if you would want your will to pas all your assets to your children immediately, or upon reaching majority (18 or 21). That might not be your intention, yet that’s what would occur if your plans designated your children as contingent beneficiaries.

It’s my experience that because of various stock options and restricted stock grants, the more senior a corporate executive, the larger the concentration in company stock, and so the greater the percentage of the estate that passes directly through the beneficiary designation rather than through the dispositive provisions of a will. If your desire was for your will to pass assets to your children at, say, ages 25, 30 and 35, be careful that one of your largest bequests, derived from employee stock plans and life insurance, passes consistent with these wishes.

You should consider speaking with your estate attorney or financial planner for guidance as to how your company’s benefits should be titled; revising your beneficiary designations only takes a few minutes.

 

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