Guest Profile

Alex Koury CFP®, CERTIFIED FINANCIAL PLANNER® professional and Wealth Manager in Scottsdale, has worked in the financial services industry for fifteen years as a financial advisor and Financial Planner. He holds Series 7, 9, 10 & 66 securities registrations– and is a Registered Representative with Commonwealth Financial Network®.

Guest Profile

Jason Hosler holds Series 7 and 66 FINRA securities registrations. He brings a technological edge to our firm and helps many of our clients stay current in the fast-moving age of the internet.

Transcript

Beneficiary Designations (cont.) – Estate and Legacy Planning – Part 2 of 6

Speakers: Jon Gay, Bruce Hosler, Jason Hosler, & Alex Koury

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Jon Gay (00:08):

Welcome back to Protecting and Preserving Wealth, I’m Jon Gay. Today’s a continuation of part two in our six-topic series on estate and legacy planning. I’m joined by Bruce Hosler, Alex Koury, and Jason Hosler of Hosler Wealth Management. Welcome, everyone.

Bruce Hosler (00:22):

Good morning, Jon.

Alex Koury (00:23):

Good morning, buddy.

Jason Hosler (00:24):

Good to see you.

Jon Gay (00:24):

Beneficiary designations, and these are so, so important. We kind of alluded to why in our first two episodes, which I’d encourage you to check out if you haven’t done so yet. But why are beneficiary designations so important just as a recap to start here?

Bruce Hosler (00:39):

Beneficiary designations first and foremost for our audience are the controlling document (not your will, not your trust) for certain types of accounts. Primarily, IRA, 401(k), and retirement type accounts, the beneficiary form trumps everything else. It trumps your will; it trumps your trust. So, you have to have that form current and filled out to make sure that your wishes are carried out.

Jon Gay (01:14):

Okay, so you started to allude to this. Do we want to tick off the lists of types of accounts that have a beneficiary designation?

Jason Hosler (01:20):

So, all of the types of accounts that fall under the retirement account umbrella, 401(k)s, 403(b)s, in addition to that, you have life insurance, you have annuities, you have pensions if there is a survivor’s benefit.

For bank accounts, you have a POD, which is pay on death. For brokerage accounts, you might have a TOD, which is transfer on death. And then here in Arizona we also have Arizona beneficiary deeds, which is a beneficial designation for real estate.

Jon Gay (01:53):

And the reason I want to put a finer point on this point that we’ve made a couple of times now, these trump wills and trusts. So, maybe you’re divorced, you’re remarried, you do a will, you do a trust, and you say, “I want to leave these accounts to my new spouse.”

Well, if you haven’t changed that beneficiary designation on the account from your old spouse, your ex is getting that money because the owners of the account are going to say or whoever’s in charge of it are going to say, “Yep, that’s who the beneficiary is. I don’t care about the will of the trust, that’s what it’s going to because that’s the documentation that I have.”

Bruce Hosler (02:26):

So, there’s some exceptions to that, Jon. Sometimes the new IRA agreements that you sign when you open up an IRA account will say an ex-spouse isn’t going to get it, it’s going to go to your current spouse. Sometimes there’s those exceptions. But on a 401(k) in an ERISA type plan, that beneficiary form the custodian is like obligated to follow the beneficiary form.

And so, we’ve seen reports in the paper of people before they were married, they named their mom and dad and they had a pension, and then they’ve married someone and were married for 40 years and died, and her husband is not named on the form and mom and dad got the pension. I mean, wow, it can be terrible if you don’t get these updated correctly.

Alex Koury (03:14):

It only takes a little bit of time to go through your beneficiary designations at least once a year. Even there’s instances where family members fall out of favor with parents and the dad or mom says, “Oh, we want to disinherit so-and-so” and then an argument of some sort, they can always bring it back in.

These are interchangeable and you don’t have to use an attorney, which is the best part. You can do these on your own time and for your own cost, which is just your time. So, don’t think these are set in stone. You can always update them anytime.

Jason Hosler (03:44):

I actually had the good version of that happen last week where a child came back into favor and the client asked me to add them back onto the beneficiary form.

Bruce Hosler (03:52):

It’s a beautiful thing.

Jon Gay (03:53):

It’s like General Hospital in the soap operas: “You’re out of the will or you’re out of the beneficiary form.”

Jason Hosler (03:57):

And you don’t have to pay an attorney each time you’re making a change too.

Jon Gay (04:01):

Worth repeating for sure. Let’s talk about the types of beneficiaries and those cascading beneficiaries.

Bruce Hosler (04:07):

There are many people out there that don’t understand that you can have actually three different types of cascading beneficiaries. You can have your primary; you can have a contingent. Now, most beneficiary designation forms will have those two, a primary and a contingent.

But most people don’t realize that you can also have what’s called a tertiary beneficiary designation, and I call it cascading beneficiaries because it cascades from the primary to the contingent, from the contingent to the tertiary. And so, we can do some really cool planning. Let me give you an example.

Jon Gay (04:45):

Please.

Bruce Hosler (04:46):

Let’s just say that we have someone that is thinking, “Hey, I want to name my wife as the primary, I want to name my children as the contingents, and I want to name my grandchildren as the tertiary beneficiaries on my IRA.” Why would we want to do that?

Well, the old guy dies, he leaves it to his wife, she goes, “You know what, I don’t need this money, I’m going to disclaim.” So, she leaves it to the children, and she says, “Look, if you don’t need this money …” the children can also disclaim. And now, the grandchildren become the beneficiaries of this IRA.

And so, we can pass it down that way with a cascading beneficiary designation capability using primary contingent or tertiary.

Jon Gay (05:33):

I’m really glad you said that, Bruce, because when you talk about primary and secondary and tertiary, I was thinking in terms of much darker scenarios where the husband and wife are killed at the same time and it would automatically go to the contingent and so on, or if there was some sort of family tragedy.

But I like what you’re describing there of having the options. I can disinherit this and pass it on to the next one in line if this isn’t money that I really need at this point in my life.

Jason Hosler (06:00):

That’s exactly right, Jon. One of the other scenarios where we see that used is you have a contingent or tertiary beneficiary that’s a charity. And so, if you have a tax deferred IRA or 401(k), and that’s part of the estate that is going to be taxed as ordinary income, and if there’s other monies that get a step up in basis because they’re not in retirement plans, they can choose to fulfill their philanthropic desires by disclaiming an IRA to leave that to a charity.

Bruce Hosler (06:33):

Excellent. And Alex, I want you to talk to our listeners – retirement accounts have special limitations, and we normally like to name individuals as beneficiaries, not necessarily a trust, because that may not be as favorable. So, talk to our listeners about why we like to name individuals, whether they’re a spouse or the children, versus perhaps maybe leaving it to their trust or something like that.

Alex Koury (07:03):

Well, here’s a great example; we have a client that they inherited two different IRAs from their parents. One of them, they were named the primary beneficiary as an individual, and on the second IRA, the trust was actually named the beneficiary of that account.

Now, there’s new rules that apply to distributions of retirement assets when you’re a non-qualified or non-eligible beneficiary of those accounts. And so, in the first example, when he inherited the IRA in his individual name, he still has 10 years to draw out those funds and take an RMD, a required minimum distribution, every year over a 10-year period, which is again as favorable as it can be in the current environment.

The second account though is again, the beneficiary was a trust. Now, he only has five years to have those funds distributed out of the IRA based on the new rule. So, the trust carries shorter distribution schedules, which again, can bump up your taxable income just as well.

What we’re really trying to do is smooth out the ride as best as we can and limit how much income is earned or recognized every year by using individuals in that case. That’s one of the major examples that we’ve come across here lately.

Bruce Hosler (08:18):

Alex, that is such a great, great example. Jason, we talk to clients sometimes about the problem sometimes when they meet with attorneys about their charitable wishes, and the attorney draws it up in the trust.

I want you to talk to our listeners about why we love separating out an IRA and leaving it as what we call a charitable IRA with that intention if they have a specific charity that they want to leave money to.

Jason Hosler (08:48):

Sure. So, the problem that Bruce is alluding to with attorneys is that you go to the meeting, you say, “Hey, I want to leave some money to my alma mater or to my church.” And the attorney says, “Sure, alright, we’ll put that $50,000 of your estate is going to your church. Put it right here in the trust, boom, done.”

The thing is, is that the attorney isn’t necessarily taking into account the entire tax picture of the client’s net worth situation. So, if the client has savings both in retirement accounts that are tax deferred as well as funds that are outside of tax deferred accounts, there is a tax advantage to having gotten a deduction for your contributions to retirement accounts, enjoyed that growth tax deferred your whole life, and then after it’s had that growth, you leave it to a charity income tax-free. The charity doesn’t pay any taxes on it, the estate’s not going to pay any taxes on it.

So, let’s say that we had a client with a million-dollar IRA, we take $50,000 of that and we open a second IRA account where the primary beneficiary is that charity named on it. That way, you are leaving it specifically to the charity.

Now, another way you could do that is again, use cascading beneficiaries. You could have the spouse be the primary beneficiary of that charitable IRA, and then have the charity be the contingent. That way, the spouse can kind of take stock of their financial picture at the time that they’re bereaved. And they can choose whether or not they need those funds or if it is now time to pass that on to charity.

Bruce Hosler (10:30):

And they can disclaim at that time. And then the spouse didn’t pay taxes, the IRA owner didn’t pay taxes, the charity doesn’t pay taxes because they’re not taxable and nobody paid taxes. It’s a hundred percent tax-free. It’s a beautiful way to use a beneficiary designation to make charitable gifts.

Jon Gay (10:49):

And before we wrap up today, gentlemen, another benefit of using a trust as a tertiary beneficiary, it’s kind of a catchall to avoid probate, right?

Bruce Hosler (10:59):

Absolutely. Alex, talk to our listeners about why we like to leave that trust many times as the tertiary beneficiary in case something happens like Jon talked about, if there’s a car accident or a plane accident.

Alex Koury (11:12):

Yeah. So, in the worst-case scenario, when the primary beneficiaries and the contingent beneficiaries are together and the plane goes down or something happens, everyone at one time; what happens to the asset or the IRA account or retirement accounts after that?

Well, it depends. If there’s that tertiary beneficiary that can be the catchall in those worst-case scenarios, where at the very least the trust can be the beneficiary of the IRA. That is a way better strategy as opposed to having not named a tertiary beneficiary and watching that asset go to probate, where now that becomes public knowledge.

You can have creditors claim against your estate saying that you owed them money of some sort. Even if it’s an unsubstantiated claim, the court has to go through the process of determining if that is correct or not. So, we’re talking time, money, and all you had to do is name this tertiary beneficiary.

Now, not all advisors know how to do this. Not all custodians offer this as part of their beneficiary planning for the accounts when you open them up at the custodian that you hold your assets. So, you want to work with a qualified advisor as well that knows how to structure the language and can have this on file to back up all of your retirement accounts, brokerage accounts, annuities, pensions, everything that we’ve talked about here today.

Jon Gay (12:34):

This is really important stuff, and I’m glad we’re covering this as part of our series. If our listeners want to contact your team at Hosler Wealth Management, I know you’ve got two offices, how do they best reach you?

Bruce Hosler (12:42):

So, Jon, they can get ahold of us, of course, at the website at hoslerwm.com. And if they want to call us, Jason, what do they call in Prescott?

Jason Hosler (12:51):

Up here in Prescott, our number is (928) 778-7666.

Bruce Hosler (12:55):

And in Scottsdale, Alex?

Alex Koury (12:57):

(480) 994-7342.

Jon Gay (13:01):

Great stuff as always, gentlemen, we’ll talk to you in a couple of weeks.

Bruce Hosler (13:04):

Thanks, Jon.

Alex Koury (13:05):

Alright, Jon, thank you.

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Voiceover (13:07):

Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

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