Beneficiary Designations Trump Your Will

Jane Young, CFP, EA

Jane Young, CFP, EA

You really don’t want the state deciding how your money is distributed when you die, so be sure to specify how you would like your assets divided.  In Colorado this is most commonly accomplished through the use of a will or beneficiary designations, in more complicated situations a trust may also be used.

Virtually, any financial account can be divided using a beneficiary designation, but it is most commonly used with retirement accounts, life insurance policies and annuities.  Assets distributed through a beneficiary designation will pass to heirs outside of probate.  In addition to assets with a beneficiary designation, assets that are held in joint name or that are designated as “transfer upon death” (TOD) will also transfer outside of probate.

Beneficiary designations and TOD accounts supersede your will, so it is of upmost importance to keep your designations current.  This is especially important when there is a major change in your life such as a marriage, divorce, or death.  Beneficiary designations are legally binding and will be enforced regardless of any changes in your relationships.

You can also transfer your real estate using a beneficiary designation. According to Steve Ezell, a local Estate Planning Attorney, this type of transfer can be accomplished with a “Beneficiary Deed”.  A Beneficiary Deed does not go into effect until death so you will have full ownership of your home while alive and you home will transfer outside of probate.  In an effort to avoid probate, many people deed property to their children and themselves. However, this could create complications if you later decide to sell your home.  It could also affect your possible Medicaid eligibility. 

Probate is the process of legally distributing your assets upon death.  In Colorado, this is usually a relatively simple and inexpensive process.  According to the Colorado Bar Association, the Uniform Probate Code has dramatically simplified probate.   Currently, over 90% of Colorado estates are not court supervised allowing the personal representative to do most of the administration.

Most individuals need a will to control the disposition of everything in their probate estate, this excludes accounts in joint name, distributed by beneficiary or distributed by TOD.  If you want all of your financial assets distributed through your will, leave your beneficiary designations blank or list the estate as the beneficiary. 

When dividing your assets with beneficiary designations or a will, Steve Ezell suggests you consider the use of percentages rather than specific dollar values.  Over time, as you make changes to your various accounts, percentages can help you maintain the desired proportion of assets to be distributed to each heir.  Additionally, identify both primary and contingent beneficiaries, just in case your primary beneficiary dies before you. Should a primary beneficiary predecease you, you will need to specify if their share goes to the remaining beneficiaries or the deceased beneficiaries’ children.

Beneficiary designations and wills are both effective tools, if you utilize them and keep them current.

Retirement Tips for All Ages

Jane Young, CFP, EA

Jane Young, CFP, EA

It’s always a challenge to balance between current obligations and saving for retirement.  A good start toward meeting your retirement goals is to get your financial house in order.  Create a spending plan that helps you live below your means.  Maintain an emergency fund of at least four months of expenses and pay off high interest consumer debt.    Establish a habit of saving at least 10% of your income.  If you are getting a late start, you may need to save 15-20% of your income.

Develop a retirement plan to determine how much you need to save on a monthly basis and how large a nest egg you will need to comfortably retire.  There are many on-line calculators available to help you run retirement numbers.  However, they are only as accurate as the data that you input and the assumptions that the model uses.  You may want to hire a fee-only financial planner to run some figures for you.

Work toward maximizing contributions to your employer’s retirement plan; take advantage of any employer match that may be provided.  Once you have contributed up to the level of your employer’s match, consider contributing to a Roth IRA.  A painless way to steadily increase your contribution percentage is to increase your contribution whenever you get a raise.  If you are self-employed, or your employer doesn’t offer a retirement plan, contribute to a SEP, Simple or an IRA.  If you are maxed out, increase your contributions as the maximum contribution limits increase or you become eligible for a catch-up contribution at age 50.

Invest your retirement funds in a diversified portfolio made up of a combination of stock and bond funds that invest in companies of different sizes, in different industries and in different geographies.  Generally, your retirement savings is long term money, so avoid emotional reactions to make sudden changes based on short term market fluctuations.  Develop an investment plan that meets your timeframe and investment risk tolerance and stick to it. 

Don’t use your retirement funds as a savings account for other financial objectives.  Unless you are in a dire emergency, don’t take distributions or borrow against your retirement funds.  When you change jobs, don’t cash out your retirement plans.  Roll your funds over to an IRA or a new employer’s plan.    Avoid sacrificing your retirement savings to fund college education for your children.

As you near retirement age, there are several ways to stretch your retirement dollars.  Retirement doesn’t have to be all or nothing.  Consider a gradual step down where you work a few days a week or on a project basis.   Try to time the payoff of your mortgage with your date of retirement.  Consider downsizing to a smaller home or moving to a more economical area.  Establish a retirement spending plan that provides funds for things you value and helps you avoid frivolous spending on things that don’t really matter.