Are your beneficiaries equal?

A frequent question often pertains to beneficiaries. “What is the best way to leave my remaining assets to my family?” A simple question with assumed simple solutions. The truth is far from simple. A multitude of variables may be relevant to you and your situation.

Let’s pretend you have two adult beneficiaries, and you intend to leave half of your estate to each person. The decision to divide each asset in half is routine and relatively simple, but the consequence can be less than desirable for your beneficiaries.

All beneficiaries may be equal in receiving your love, but that “equality” is generally not even from the economic and circumstances surrounding each recipient. Therefore, all beneficiaries are not equal. Consider issues like: How old are they? What is their income level? Do they have any personal issues (e.g., addictions, marital concerns, special needs, or poor spending habits)?  Your answers should dictate your strategy in dividing your estate most efficiently for those you love.

Imagine your estate consists of $1,000,000 – $500,000 in a tax-deferred IRA, $250,000 in a Roth IRA, $200,000 in your home, and $50,000 in a taxable brokerage account. Each of these assets has value, but they all play by different rules under the tax code. For instance, if one of your beneficiaries has a high income and the other is in an average income position, the divided accounts may have the same dollar figure. Still, the net tax result could be significantly different. The beneficiary with the higher tax bracket gets more value out of the Roth IRA and less out of the tax-deferred IRA. Sound planning with the help of an expert can show you how to divide the assets, so the net result is your desired outcome. Pull the IRS out of the equation!

Life can be challenging. Consider for a moment that one beneficiary has struggled with addictions or other personal matters (e.g.., spending habits, a bad marriage, etc.), and the other appears to have their life in order. That includes handling their finances well. Leaving 50% to each of these beneficiaries may be “fair” but could result in two drastically different outcomes. Working with an advisor who knows your situation and is knowledgeable about the family dynamics can alleviate unintentional burdens stemming from a gift you intended to be a blessing.

An enormous blessing for your family is a simplification in the transfer process at the time of your demise. If you aren’t using a trust, ensure all your assets have updated beneficiary designations or use transfer-on-death declarations to eliminate probate and simplify the transfer process. However, those actions do not alter the challenges facing the social and financial dynamics of their lives. If you know that your beneficiaries are different, or if you want to protect them from future economic issues, find a qualified and experienced advisor who can assist you in correctly positioning your assets to go to the right people at the right time.

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