Dear Kim,
My husband passed away unexpectedly 3 months ago. We did not have any children, and I’m now working to readjust some of my accounts. We previously had our accounts held jointly, and I didn’t have to worry about beneficiaries. What are some things that I need to consider before I name a new beneficiary?
Sincerely,
Redefining Legacy After Loss
Dear Redefining Legacy After Loss,
I’m assuming you were each other’s beneficiaries. So, now, you have to think about who will come next. I have clients who name their children outright as their beneficiaries, but others who name charities or other organizations that are important to them. Some clients have children that for some reason, aren’t able to manage their money responsibly, so they name a trust as their beneficiary to manage the funds for the benefit of their children. You would need to seek the help of an attorney to draft the trust.
One thing I caution clients against is naming a child or children as joint owners of bank accounts or other assets. There are several reasons, but some important ones are that those assets, be it a bank account or a home, are now considered assets of that child, and if there were to be a lawsuit involving that child, those assets could be attached. The other reason is if you name one child, say the one that lives closest to you, when you pass, that asset becomes the sole property of that child, just as the assets you and your husband owned passed directly to you. That leaves out your other beneficiaries. You can give a child signing authority on your bank account to assist you should you need help getting your bills paid, but it does not give them ownership of the account. Another reason not to add a child to a large asset like a home or brokerage account is that at the time of your death, any property owned solely by you receives a step up in basis, and there would be much less tax due, if any. A step up means that the current value at your death becomes their starting point for taxes. Let’s say you paid $200,000 for your home many years ago. It may now be worth $500,000. If you add a child as the owner of that asset, they assume your basis of $200,000 and will owe capital gains on the $300,000 gain. If you pass it to them in your will, their basis is now $500,000, and if sold soon after your death, there may be little to no gain that will be taxed.
I hope this helps, but if you have further questions, please reach out. I’d be happy to have a conversation about it.
Kim
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