Category: Retirement

Choosing Retirement Account Beneficiaries Requires Some Thought

While the execution of wills requires formalities like witnesses and a notary, the reality is that most property passes to heirs through other, less formal means.

Many bank and investments accounts, as well as real estate, have joint owners who take ownership automatically at the death of the primary owner. Other banks and investment companies offer payable on death accounts that permit owners to name the person or people who will receive them when the owners die. Life insurance, of course, permits the owner to name beneficiaries.

All of these types of ownership and beneficiary designations permit these accounts and types of property to avoid probate, meaning that they will not be governed by the terms of a will. When taking advantage of these simplified procedures, owners need to be sure that the decisions they make are consistent with their overall estate planning. It’s not unusual for a will to direct that an estate be equally divided among the decedent’s children, but to find that because of joint accounts or beneficiary designations the estate is distributed totally unequally, or even to non-family members, such as new boyfriends and girlfriends.

It’s also important to review beneficiary designations every few years to make sure that they are still correct. An out-of-date designation may leave property to an ex-spouse, to ex-girlfriends or -boyfriends, and to people who died before the owner. All of these can thoroughly undermine an estate plan and leave a legacy of resentment that most people would prefer to avoid.

These concerns are heightened when dealing with retirement plans, whether IRAs, SEPs or 401(k) plans, because the choice of beneficiary can have significant tax implications. These types of retirement plans benefit from deferred taxation in that the income deposited into them as well as the earnings on the investments are not taxed until the funds are withdrawn. In addition, owners may withdraw funds based more or less on their life expectancy, so the younger the owner the smaller the annual required distribution.  Further, in most cases, withdrawals do not have to begin until after the owner reaches age 70 1/2. However, this is not always the case for inherited IRAs.

Following are some of the rules and concerns when designating retirement account beneficiaries:

  • Name your spouse, usually. Surviving husbands and wives may roll over retirement plans inherited from their spouses into their own plans. This means that they can defer withdrawals until after they reach age 70 1/2 and take minimum distributions based on their age. Non-spouses of retirement plans must begin taking distributions immediately, but they can base them on their own presumably younger ages.
  • But not always. There are a few reasons you might not want to name your spouse, including the following:
    • He or she is incapacitated and can’t manage the account
    • Doing so would add to his or her taxable estate
    • You are in a second marriage and want the investments to benefit your first family
    • Your children need the money more than your spouse
  • Consider a trust. In a number of the above circumstances, a trust can solve the problem, providing for management in the case of an incapacitated spouse, permitting assets to benefit a surviving spouse while being preserved for the next generation, and providing estate tax planning opportunities. Those in first marriages may want to name their spouse as the primary beneficiary and a trust as the secondary, or contingent, beneficiary. This permits the surviving spouse, or spouse’s agent if the spouse is incapacitated, to refuse some or all of the inheritance through a “disclaimer” so it will pass to the trust. Known as “post mortem” estate planning, this approach permits flexibility to respond to “facts on the ground” after the death of the first spouse.
  • But check the trust. Most trusts are not designed to accept retirement fund assets. If they are missing key provisions, they might not be treated as “designated beneficiaries” for retirement plan purposes. In such cases, rather than being able to stretch out distributions during the beneficiary’s lifetime, the IRA or 401(k) will have to be liquidated within five years of the decedent’s death, resulting in accelerated taxation.
  • Be careful with charities. While there are some tax benefits to naming charities as beneficiaries of retirement plans, if a charity is a partial beneficiary of an account or of a trust, the other beneficiaries may not be able to stretch the distributions during their life expectancies and will have to withdraw the funds and pay the taxes within five years of the owner’s death. One solution is to dedicate some retirement plans exclusively to charities and others to family members.
  • Consider special needs planning. It can be unfortunate if retirement plans pass to individuals with special needs who cannot manage the accounts or who may lose vital public benefits as a result of receiving the funds. This can be resolved by naming a special needs trust as the beneficiary of the funds, although this gets a bit more complicated than most trusts designed to receive retirement funds. Another alternative is not to name the individual with special needs or his trust as beneficiary, but to make up the difference with other assets of the estate or through life insurance.
  • Keep copies of your beneficiary designation forms. Don’t count on your retirement plan administrator to maintain records of your beneficiary designations, especially if the plan is connected with a company you worked for in the past, which may or may not still exist upon your death. Keep copies of all of your forms and provide your estate planning attorney with a copy to keep with your estate plan.
  • But name beneficiaries! The biggest mistake many people make is not to name beneficiaries at all, or they end up in this position by not updating their plan after the originally-named beneficiary passes away. This means that the plan will have to go through probate at some expense and delay and that the funds will have to be withdrawn and taxes paid within five years of the owner’s death.

In short, while wills are important, in large part because they name a personal representative to take charge of your estate and they name guardians for minor children, they are only a small part of the picture. A comprehensive plan needs to include consideration of beneficiary designations, especially those for retirement plans.

How States Are Dealing With Older Drivers

If you have been reading my newsletters, you know that I come in contact with many adult children who are concerned about the safety of their elderly parents driving on the roads we all share.

It is a sensitive topic and the dangers are real. Unfortunately, the solutions are not easy to facilitate.

I saw this recent AP Press article and decided to share it with you.

Jerry Wiseman notices it’s harder to turn and check his car’s blind spots at age 69 than it was at 50. So the Illinois man and his wife took a refresher driving course, hunting tips to stay safe behind the wheel for many more years – a good idea considering their state has arguably the nation’s toughest older-driver laws.

More older drivers are on the road than ever before, and an Associated Press review found they face a hodgepodge of state licensing rules that reflect scientific uncertainty and public angst over a growing question: How can we tell if it’s time to give up the keys?

Thirty states plus the District of Columbia have some sort of older-age requirement for driver’s licenses, ranging from more vision testing to making seniors renew their licenses more frequently than younger people.

At what age? That’s literally all over the map. Maryland starts eye exams at 40. Shorter license renewals kick in anywhere from age 59 in Georgia to 85 in Texas.

The issue attracted new attention when a 100-year-old driver backed over a group of schoolchildren in Los Angeles late last month.

That’s a rarity, but with an imminent surge in senior drivers, the federal government is proposing that all states take steps to address what the National Highway Traffic Safety Administration calls “the real and growing problem of older driver safety.”

Here’s the conundrum: “Birthdays don’t kill. Health conditions do,” said Joseph Coughlin, head of the Massachusetts Institute of Technology’s AgeLab, which develops technologies to help older people stay active.

Healthy older drivers aren’t necessarily less safe than younger ones, Coughlin points out. But many older people have health issues that can impair driving, from arthritis to dementia, from slower reflexes to the use of multiple medications.

There’s no easy screening tool that licensing authorities can use to spot people with subtle health risks. So some states use birthdays as a proxy for more scrutiny instead.

Senior driving is a more complicated issue than headline-grabbing tragedies might suggest. Older drivers don’t crash as often as younger ones. But they also drive less.

About 60 percent of seniors voluntarily cut back, avoiding nighttime driving or interstates or bad weather, said David Eby of the University of Michigan’s Center for Advancing Safe Transportation throughout the Lifespan.

Measure by miles driven, however, and the crash rate of older drivers begins to climb in the 70s, with a sharper jump at age 80, according to the Insurance Institute for Highway Safety. Only teens and 20-somethings do worse.

That rising risk reflects the challenge for families as they try to help older loved ones stay safe but still get around for as long as possible, which itself is important for health.

The good news: Fatal crashes involving seniors have dropped over the past decade, perhaps because cars and roads are safer or they’re staying a bit healthier, said the Insurance Institute’s Anne McCartt.

Yet the oldest drivers, those 85 and up, still have the highest rate of deadly crashes per mile, even more than teens.

And more often than not, they’re the victims, largely because they’re too frail to survive their injuries.

And seniors are about to transform the nation’s roadways. Today, nearly 34 million drivers are 65 or older.

By 2030, federal estimates show there will be about 57 million – making up about a quarter of all licensed drivers. The baby boomers in particular are expected to hang onto their licenses longer, and drive more miles, than previous generations.

Specialists say more seniors need to be planning ahead like Jerry Wiseman and his wife Sandy.

“Absolutely we want to be as good drivers as we can possibly be for as long as we can,” said Wiseman, of Schaumburg, Ill.

At an AARP course, Wiseman learned exercises to improve his flexibility for checking those blind spots. He takes extra care with left-hand turns, which become riskier as the ability to judge speed and distance wanes with age. He knows to watch for other changes.

“We’ll be ready when it’s time for one of us to stop,” he said.

Where you live determines what extra requirements, if any, older adults must meet to keep their driver’s license.

Among the most strict rules: Illinois requires a road test to check driving skills with every license renewal starting at age 75 – and starting at age 81, those renewals are required every two years instead of every four. At 87, Illinois drivers must renew annually.

In Washington, D.C., starting at age 70, drivers must bring a doctor’s certification that they’re still OK to drive every time they renew their license.
New Mexico requires annual renewals at 75.

Geographic variability makes little sense, said Jake Nelson, AAA’s director of traffic safety advocacy and research.
“Either I’m safe to drive or I’m not. Where I live shouldn’t matter,” he said.

Yet when Iowa drivers turn 70, they must renew their license every two years instead of every five. Neighboring Missouri lets the 70-year-olds renew every three years instead of every six.

Some states introduce age requirements after high-profile accidents. Massachusetts now requires drivers to start renewing licenses in person at age 75, with proof of an eye exam.

The change came after an 88-year-old driver struck and killed a 4-year-old crossing a suburban Boston street in 2009.

This summer, the National Highway Traffic Safety Administration proposed a national guideline for older driver safety that, if finalized, would push states to become more consistent.

Among the recommendations: Every state needs a program to improve older driver safety; doctors should be protected from lawsuits if they report a possibly unsafe driver; and driver’s licenses should be renewed in person after a certain age, tailored to each state’s crash data.

Still, many states say their main focus should be on inexperienced teen drivers and problems such as texting behind the wheel.

“Teens are risk takers. Our older drivers are risk avoiders,” said Alabama state Rep. Jim McClendon. Alabama drivers renew licenses every four years, with no older age requirements.
New Hampshire last year stopped requiring road tests when 75-year-olds renewed their licenses.

The law was repealed after an 86-year-old legislator called it discriminatory.
It’s not the only state worrying about age discrimination.

“You don’t want to go around and say, ‘This person is 85. We’ve got to take them off the road.’ That wouldn’t be fair,” said Assemblyman David Gantt of New York, where licenses last for eight years.

On the other side is the family of a Baltimore college student who died last year after being run over by an 83-yearold driver who turned into his bike lane.

Maryland next month begins issuing licenses that last longer – eight years instead of five – despite an emotional appeal from the mother of Nathan Krasnopoler that that’s too long for the oldest drivers.

“You should be looking at your drivers to be sure they’re able to safely drive. There’s plenty of research that as we age, things do change and we may not be aware of those changes,” said Susan Cohen, who now is urging Maryland officials to study adding some form of competency screening, in addition to the required eye exams, to license renewal.