Certain Asset Distribution is Unaffected By a Will

Writing a Will is the foundation of your estate plan.  But don't overlook the fact that some of your assets may not be covered by the provisions of your Will. You'll need to address how these assets will be distributed on a case-by-case basis, using a beneficiary designation form for each.  Assets that are not typically affected by wills include: life insurance, annuities, retirement plans, and individual retirement accounts (IRAs.)

Life Insurance

Life insurance is a contract between you and a life insurance company. In very simple terms, you promise to make premium payments to the life insurance company. In exchange, the company promises to pay a specific dollar amount to your beneficiary (or beneficiaries) upon your death. You decide who will be the beneficiaries by completing a beneficiary designation form.

Annuities

Annuities are investments under which an individual makes one or more payments to an annuity company (usually a life insurance company.) In exchange, the life insurance company agrees to invest the payments and make periodic return payments to the individual (“the annuitant”). Sometimes the agreement is that return payments will begin as of a certain date and will end at the annuitant’s death. In other cases, the payments will continue after death to a beneficiary designated by the annuitant.

Retirement Plans

Retirement plans, including pension plans and 401(k) plans, are arrangements established by employers for their employees. Generally, the employer agrees as part of the employment arrangements to make periodic payments to a retirement plan that has been established by the employer. The payments to your account are invested. You do not pay taxes on the payments to your account or the earnings on your account until you start to receive distributions upon your retirement. To provide for the possibility that you may die prior to receiving all of your retirement benefits, a beneficiary designation should be completed.

Many individuals have retirement plans in which they have accumulated significant investment funds that have a very important tax characteristic -- these funds represent income on which income taxes have not been paid. In most cases, these funds cannot be withdrawn without penalty until you reach age 59 1/2 years. When you do withdraw the funds, you will have to pay income taxes on the amount withdrawn.

Individual Retirement Accounts (IRAs)

Individual retirement accounts (IRAs) are often used by individuals who do not have employer-sponsored retirement benefits. IRA accounts can be set up with banks, brokerage firms and other investment related companies. Payments by the individual are deductible for income tax purposes in some cases. These accumulated payments, as well as the income earned by the IRA account, are not taxed for income tax purposes until the individual begins receiving distributions upon retirement. As part of the process of establishing an IRA account, you must complete a beneficiary designation to provide for the possibility that you may die prior to receiving full distribution from your IRA account.

Designating Beneficiaries

The distribution of these assets after death is determine by beneficiary designation forms. Your will does not control how those benefits are paid unless your beneficiary designations specifically refer to your will with appropriately terminology. Common terms to refer to intangible assets include:

• Joint tenants (with rights of survivorship): When one joint owner dies, the surviving joint tenant automatically owns the deceased owner’s interest, without regard to the provisions of the deceased owner's will.
• Life insurance proceeds: The funds paid to designated beneficiaries under a life insurance policy.
• Retirement plan benefits: Payments that are made to you and your designated beneficiaries from a pension plan or other retirement account.
• Annuity contracts: A contract under which you invest a specific amount with an insurance company or other investment company in exchange for the right to receive periodic payments.
• Individual Retirement Account: An investment account into which you can transfer money, subject to limitations.

If you ever need help, speaking to an estate planning attorney is a smart idea. The cost of speaking to an attorney is worth it compared to the possibility of making a costly mistake.

Laws on this topic may vary from state to state. This content is not meant to provide you with complete information and it is not intended to be legal or tax advice. It is recommended that you consult with your own attorney, accountant or other advisor regarding your specific situation.