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| February 1, 2005 | The
Monthly Newspaper of the NYSSCPA |
Vol.
8, No.2 |
The Importance of Naming Contingent Beneficiaries for Disclaimers
By Paul Katz
Naming a beneficiary and keeping that choice up to date are important parts of purchasing a life insurance policy or annuity contract.
A beneficiary is a person or institution, such as a trust fund, a charity or a company, that is named to receive the proceeds of a life insurance policy or annuity contract upon the death of the insured or annuitant.
But policy holders should also name a secondary, contingent beneficiary, who will provide a “contingency” if the primary beneficiary dies before the insured or annuitant. Naming a contingent beneficiary prevents the proceeds of the policy from going into the estate of the insured or annuitant if the primary beneficiary predeceases them, which could cause probate action, increase estate costs, and delay the proceeds from reaching the intended individuals.
Policy holders need to pay special attention to the wording of beneficiary designations to ensure that benefits go to the right person or entity. A birth or adoption of a child, a change in partnership (or corporate) interests, a marriage or divorce can all affect the original choice of who will receive the death benefit. For example, if “wife (or husband) of the insured” is written, without specifying a specific name, an ex-spouse (or even ex-partner) could receive the proceeds. On the other hand, if specific children are named as primary or contingent beneficiaries, any later-born or adopted children will not receive any proceeds.
Combining named beneficiaries with disclaimers can be useful in estate planning. Disclaimers allow a beneficiary to legally refuse the receipt of proceeds. The refusal by a beneficiary to receive proceeds for a life policy or annuity contract can be advantageous in a number of situations:
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A wealthy child inherits from her parents and by disclaiming the interest it will pass to her children, thus bypassing her generation for estate tax (1) purposes (subject to potential generation-skipping transfer tax).
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A surviving spouse is given the entire estate under the unlimited marital deduction, and by disclaiming a portion of the interest equal to the applicable credit amount of the deceased spouse, he can avoid having that portion taxed in his estate when he later dies.
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A surviving spouse or child is given a general power of appointment over an interest, which will make it includable in her estate. This power can be disclaimed to avoid the additional tax.
If the primary beneficiary is incapacitated, or there is a potential for the primary beneficiary to receive government assistance and means testing is involved, the primary beneficiary can “disclaim” the funds and it would pass to the contingent beneficiary.
Another situation that might warrant a disclaimer is when children (or even grandchildren, an opportunity for generation skipping) are the contingent beneficiaries, and the proceeds are not needed by the primary beneficiary.
To meet the requirements of a successful disclaimer, the disclaimer must meet the requirements of IRC Sec. 2518, which are:
1) The refusal to accept the interest must be irrevocable and unqualified;
2) It must generally (2) be made within nine months after the transfer creating the interest (i.e., death), or nine months after the disclaimant’s 21st birthday, if that is later;
3) It must be in writing;
4) The disclaimant may not have accepted any benefits from the disclaimed interest; and
5) Without any direction on the part of the disclaimant, the interest must pass to another person or entity (i.e., spouse, children, charity, etc.). A written transfer of an entire interest in property to the person(s) who would have received the same had it been disclaimed will be treated as an effective disclaimer, provided the other listed requirements are met.
Paul Katz is a member of the New York State Society of CPAs’ Risk Management and Business Insurance Committee. He holds the accredited estate planner designation, is a member of the Estate Planning Council of Westchester, and has a certification in long-term care, as well as a certificate in business succession planning from the American College. He can be reached at 914-946-2524, ext. 619.
