Beneficiaries PRESENTED BY UAWFCAFORDGENERAL MOTORS LEGAL SERVICES PLAN

Beneficiaries PRESENTED BY UAW-FCA-FORD-GENERAL MOTORS LEGAL SERVICES PLAN APRIL 25, 2019

Who is a Beneficiary? Beneficiaries are individuals who may inherit assets you own upon your death. They may inherit under your will or trust, or by beneficiary designations you sign in relation to bank accounts, retirement accounts, life insurance policies or deeds. We will be discussing these beneficiary designations today.

Beneficiary designations and your will The beneficiary designation controls. The will or trust does not control the disbursement of these assets. It’s important to list the beneficiaries in a manner that is consistent with your estate planning wishes.

What does naming a beneficiary accomplish? A beneficiary designation: causes property to pass outside the will or trust of the deceased grantor is not subject to the probate process and claims against your estate is generally not taxable to the beneficiary upon receipt is commonly used for bank accounts, 401(k)’s, life insurance and real estate

Designating your beneficiaries: Some pointers The owner of the asset designates the beneficiaries. This may be done by a form supplied by a bank, 401(k) provider or life insurance company, or by deed in the case of real estate. Keep a copy of each designation of beneficiary and make sure your heirs know where to find these. Beneficiaries need to know what institutions to contact and claim their funds. Sometimes no one knows about an account or fund and it goes unclaimed. The designation can be worded differently for different types of assets. They all provide that the property goes directly to the person or persons named.

Different designations Payable on Death (“POD”): Typically used for bank accounts and CDs. The balance in the account will be paid directly to named beneficiaries. Example: Payable on death equally to my 3 children John Jones, Jane Jones and Joe Jones. Transfer on Death (“TOD”): Typically used for investment accounts and real estate. The asset will be paid directly to named beneficiaries. Example: Investment account is transferred on death: 60% to Jane Jones and 40% to Joe Jones. Beneficiary Designations Typically used for retirement plans and life insurance policies. Proceeds will pass directly to the named beneficiaries according to the stated directions. Example: Life insurance proceeds to be paid as follows: 40% to Jane Jones, 30% to Joe Jones, 30% to Janis Jones, .

Primary and contingent (secondary) beneficiaries The primary beneficiary or beneficiaries are the people you wish to receive the asset upon your death – your first choice. A contingent beneficiary will receive the benefits only if the primary beneficiary has died prior to you at the time the benefit is to be paid – your second choice. A common example is listing a spouse as primary beneficiary and children as contingent beneficiaries. The children would get the asset only if the spouse dies before the grantor.

Considerations when choosing a beneficiary Think about your entire estate plan. How much are people getting from other assets? Do you want the distribution to be the same as in your will or are you making different provisions to certain people? Do you want one person as beneficiary on all accounts? Do you want some accounts to be divided equally among several people? Is your beneficiary able to handle the asset? Are they minors, disabled? Discuss these considerations with your Plan attorney when you are creating your estate plan.

Beneficiary naming pitfalls to avoid: Not naming everyone If you name just one child as beneficiary when you want all assets to be divided among all children: The named single beneficiary child does not have to share with your other children. Your will does not control the distribution of assets when a beneficiary is named on an account. Even if your will says everything is divided equally among all your children, the single beneficiary child does not have to follow the terms of the will. This can create hard feelings and uncertainty as to whether the asset was divided fairly.

Beneficiary naming pitfalls to avoid: Naming minor children Insurance companies and financial institutions generally will not release money to a minor. You can name a guardian as designated in your estate plan. You can name your estate as beneficiary with instructions in your will or trust that the proceeds are to be spent for the benefit of the child or children. You will want to decide if the minor should receive the benefits at the age of 18 or a later date.

Beneficiary naming pitfalls to avoid: Naming a disabled child as beneficiary There is the question as to whether the disability prevents the child from competently handling the funds. If the child is receiving governmental benefits, the inherited funds could disqualify the child from continuing to receive their benefits. Child would have to spend down the benefits Child would have to go through the application process again Instead, special needs trust can be drafted for disabled children so they can receive the insurance benefits without losing government assistance. Consult your Plan attorney about providing for your disabled child.

Beneficiary blunders: Failing to name a beneficiary Your assets will go through probate and be distributed according to your will. If you do not have a will, they will be distributed according to your state’s inheritance laws. This may not be how you meant this asset to be distributed. The assets could be subject to claims against your estate. With some assets – such as retirement plans or life insurance – there may be legal or contract provisions that designate a “default” beneficiary who may not be the person you wish to receive the benefit.

Beneficiary blunders: Failing to update beneficiaries There are negative consequences. The person who gets your money or property may not be the person you intended. Even if you changed your mind, the written beneficiary designation controls. Significant life events should remind you to review your beneficiary designations and make needed changes.

Beneficiaries and marriage Review all of your beneficiary designations soon after you marry If you want your spouse to receive your accounts or other assets, list your spouse as primary beneficiary. If you do not want your spouse to get all of an asset, make sure your designations are clear. Second marriages are an important time to review beneficiaries. Do you want your children from a prior marriage to be your beneficiaries? Do you want your new spouse to be the beneficiary? Do you want to split the assets between the new spouse and your children?

Beneficiaries and divorce Review all of your beneficiary designations after a divorce. Don’t forget bank accounts, retirement accounts, and life insurance policies. Your ex-spouse could inadvertently receive your assets if you fail to update your beneficiary form. You may want to change your designation to your children, new spouse or other family members.

Beneficiaries and children After birth of a child: Consider how you want to provide for your child in the event of your death. If you specifically name each of your children as beneficiaries and forget to add the new addition to your family, that child could be left out of the disbursement of your assets.

Death of a beneficiary After death of beneficiary: Your contingent beneficiary will now be the recipient. Consider updating both primary and contingent beneficiaries. If both your primary and contingent beneficiaries die before you, and you do not designate new beneficiaries, it will be as if you had not named a beneficiary at all.

Payable on death (“POD”) is an arrangement between a bank or credit union and a client that designates beneficiaries to receive all the client's assets. Be sure to list all beneficiaries you want to receive the funds in your account. Bank accounts and beneficiaries If you are not sure if you completed a POD form with your bank, contact them and ask for a copy. If they don’t have a record of a POD for you, ask for a form and complete it as soon as possible. After the death of the account holder, beneficiaries should contact the bank or credit union. They will likely have to supply a death certificate. The account funds will be distributed according to the terms of the POD. After death of the account holder, beneficiaries do not have to pay income tax on inherited accounts. However, any interest received or accrued is considered taxable and is reported like any other interest received.

401(k)’s have special rules regarding spouses. If you want someone other than your spouse to get all or part of your 401(k), your spouse must sign a waiver. • This should be done: • When you open your 401(k) if you are already married • After your marriage if you already have a 401(k) • If you do nothing, your spouse will get your entire 401(k) upon your death You can list contingent beneficiaries in the event your spouse does not survive you. Beneficiaries and 401(k)’s

When the 401(k) account holder dies The beneficiary contacts the account provider. Generally, a form is completed and a death certificate is required. The funds are distributed according to the form’s terms.

401(k) Beneficiary's options Spousal beneficiary options Generally speaking, the spouse should not cash out the account as this will trigger significant tax liability The spouse may be able to roll the proceeds into his/her own IRA and avoid taxes The spouse could then take required minimum distributions based on their age not the decedent’s Non spouse beneficiary options The beneficiary could take a lump-sum distribution, but this would be a taxable at the beneficiary’s ordinary income level. The beneficiary could establish an inherited IRA and withdraw an annual amount based on the life expectancy of the beneficiary For more information on 401(k)’s, we suggest your view the Plan’s 401(k) webinar and of course consult your Plan administrator.

The beneficiary of your life insurance policy will receive the benefit in the event of your death Life insurance and beneficiaries The beneficiary should notify the insurance company and will likely have to complete a claim form and supply a death certificate Life insurance proceeds are considered taxfree to the beneficiary and are not reported as income However, any interest received or accrued is considered taxable and is reported like any other interest income

Lady Bird Deeds (Enhanced Life Estate Deed) This is a special deed that gives the owner continued ownership and control over the property until his or her death. Example: John Jones to John Jones for his life time with unrestricted power to convey the property during his lifetime. If John Jones has not conveyed the property prior to his death, the property is conveyed as tenants in common to Jane Jones and Joan Jones. When the owner dies, the property is transferred automatically to the named new owners without the need for probate. Not all states permit these deeds. Consult your Plan attorney about the laws in your state.

The Lady Bird deed lets you: Some advantages of a Lady Bird Deed keep the right to use and profit from the property for your lifetime keep the right to sell the property at any time keep the right to change your mind/beneficiaries avoid making a gift that might be subject to federal gift tax avoid jeopardizing your eligibility for Medicaid in some states, prevents the property from being sold, after your death, to repay the cost of Medicaid benefits you received under Medicaid recovery programs

Lady Bird Deeds and your estate plan A lady bird deed is a non-probate transfer. The property will pass to the remainder beneficiaries named in the lady bird deed regardless of what the will says. If a will says the house goes to all three children, but the lady bird deed leaves the property to only one child, the deed controls. It’s important to deed to all those you wish to inherit.

Lady Bird Deeds and tax implications The Lady Bird deed can provide added tax benefits. You are not subject to gift tax because the property does not actually transfer title to your beneficiaries during your lifetime. The property will receive a stepped-up basis upon your death. This means that the gain for tax purposes is calculated by the sale price received by your children, minus fair market value of the home at the date of your death. This makes the taxable gain to your children much smaller than if your original purchase price were used.

Some disadvantages of a Lady Bird Deed Sometimes this deed does not work well if you have multiple beneficiaries. Unlike a will, the lady bird deed does not name a Personal Representative to be in charge of the sale or disposition of the property. Beneficiaries have to work together to sell the property following the owner’s death, and disagreements can arise over whether to sell the property or the property’s value. There can be issues if one of the beneficiaries dies. The deed may not make provisions for the descendants of the beneficiaries. Example: If one child dies, does the owner want the grandchildren by that child to get that share or does the owner want the remaining children to divide the proceeds?

Some disadvantages – continued Liens on the property should be considered. If there is a large, outstanding mortgage, the beneficiary is getting the value of the property, less the mortgage. Example: Jane wants to divide her estate evenly between her two children. She is leaving her child Mary 75% of her $200, 000 estate in her will. She signs a lady bird deed leaving her home valued at $150, 000 to her son John. However, there is a mortgage balance of $110, 000 on the home. The result is Mary will inherit $150, 000 and John will inherit $90, 000 – not the even distribution Mary intended. Discuss whether a lady bird deed is a good option for you with your Plan attorney as part of your estate planning.