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Left Behind

Planning So Beneficiaries Truly Benefit

In an effort to protect funds and plan for the future, people choose beneficiaries, strategically shift assets, or add joint owners with good intentions, but often without fully understanding the potential ramifications. Poor decisions can be costly, sometimes causing beneficiaries to receive considerably less than intended. Consider these common mistakes and try to avoid them in your own financial planning.

Stepped up basis: The basis of many assets – such as mutual funds, stocks, and real estate – gets stepped up to current values on the date of, or within nine months of, the owner’s death. With the step up in basis, quite possibly there would be no capital gains tax owed.

Here’s an example: A referral client came to my office for guidance after her mother died. More than fifteen years ago the mother had transferred her home to this daughter to avoid, in her mind, the state being able to take her home if she ever needed extra funds for critical care (which fortunately for the mother and the family, she never did). At the time of transfer, the house was worth $225,000. Upon the mother’s death, however, the daughter sold the property for $437,000 and the $212,000 gain in value was exposed to a twenty percent capital gains tax, amounting to around $42,400. If the mother had sought financial counsel she might have been advised that by leaving the house in her own name, the full, updated value of the home could have come to her daughter, possibly without any capital gains tax owed, providing a higher net gift. Instead, that one decision carried quite a cost.

Qualified account beneficiaries: Setting up non-spouse beneficiaries also may negatively affect the amount beneficiaries actually receive following the benefactor’s death. If you want your children to receive funds from your estate, one strategy is to consider using assets not linked to pre-tax saved accounts, such as 401k, 403b, 457, and the like. When beneficiaries other than a spouse receive these assets upon your death, in most cases they are required to receive the entire balance in a lump sum or paid out over no more than five years before potentially accruing penalties. These requirements can cause additional challenges and costs.

Here’s an example: A client’s father named his two adult children by his first marriage, along with his second wife, as his 401k beneficiaries. He may have adjusted his plans before he died had he realized that of the $100,000 left to his children, only $60,000 would be received by them. Both sons were realizing substantial incomes at the time of their father’s death, and adding the 401k income to their own taxable income pushed them both into higher tax brackets. The wife could have rolled the money into her name as a spousal beneficiary and delayed payment until after she turned fifty-nine-and-a-half. The father also could have left his wife the full 401k and named his sons as partial beneficiaries on his personal and employer-sponsored insurance policies. Instead, in essence the federal government became the fourth beneficiary, which was never the father’s intent.

Every family and every circumstance is different, so making important financial decisions in a vacuum is not the best way to plan. Even with what seems to be a simple choice, speak with someone who is knowledgeable and experienced so it becomes crystal clear how that choice might affect your intentions. Ask questions and plan wisely, so that whenever possible you can give the gross, not the net.

Angie Z. Shay has worked in the financial services industry for more than 22 years. She is president of THE PATH Financial Strategies, LLC. Angie Shay is a financial adviser with Eagle Strategies LLC, a Registered Investment Adviser and an indirect wholly owned subsidiary of New York Life Insurance Company. THE PATH Financial Strategies, LLC is not owned or operated by Eagle Strategies or its affiliates. Neither THE PATH Financial Strategies, LLC or Angie Z. Shay provide tax or legal advice.
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