Keep Your Beneficiary Designations Updated
The Supreme Court of the United States recently declared that a divorce decree does not override beneficiary designations. In Kennedy v. Plan Administrator for DuPoint Savings and Investment Plan, the plan participant married in 1971, and completed a beneficiary designation in 1974. No contingent benefiary was named.
The two divorced in 1994. Under the divorce decree, the ex-wife waived any rights she had in the plan. However, the beneficiary designation form was never updated. Kennedy wanted the assets under the plan, $402,000 to go to his daughter, but never updated the form (he did update the forms for a different plan). The daughter, also executor of the estate, wanted the Plan administrator to distribute the assets to her, but they would not because the beneficiary designation form still listed the ex-wife.
The court noted that a qualified domestic relations order (QDRO) can override a beneficiary designation, but that a signed divorce decree cannot. Whether this decision by the court extends to other agreements is unclear, but what is clear is that the designation form carries significant weight, and should be updated regularly.
A thorough financial plan should include periodic review of these and other forms, and you should review these (as well as all other estate plan documents) whenever a significant life event occurs.
What is Probate, and Why Is Avoiding It In California So Important?
Probate is a legal proceeding which is used to wind up a person’s legal and financial affairs after they pass away. If you haven’t done any estate planning, your estate may have to pass through probate. If you have a will, your estate may still have to pass through probate. Why is this such a bad thing?
Probate is expensive, often difficult, and may take a long time. California Probate Code Section 10810 sets out the maximum fee attorneys can charge for probating an estate. This fee is:
Four percent on the first one hundred thousand dollars ($100,000). Three percent on the next one hundred thousand dollars ($100,000). Two percent on the next eight hundred thousand dollars ($800,000). One percent on the next nine million dollars ($9,000,000). One-half of 1 percent on the next fifteen million dollars ($15,000,000). For all amounts above twenty-five million dollars ($25,000,000), a reasonable amount to be determined by the court.
What’s that all mean?
- $100,000 estate will pay a $4,000 fee
- $200,000/$7,000
- $300,000/$9,000
- $400,000/$11,000
- $500,000/$13,000
- $750,00/$18,000
- $1,000,000/$23,000
The first kicker to all of this (yes there is more than one kicker!) is, the fee is calculated without regards to any loans or liabilities on the assets. If you are single and pass away owning a house worth $500,000 with a mortgage of $250,000, it does not matter. The fee will be calculated on the $500,000 amount. The second kicker? The executor and the attorney is each entitled to the full amount of the statutory fee. So that $500,000 estate may be subject to a maximum of $26,000 in fees for the executor and attorney alone. Of course either party may waive that amount and accept a lower fee. Or they may not.
There are several ways to avoid probate, establishing and funding a revocable living trust is one of them. Also, estates of less than $100,000 may skip probate as long as no real estate is involved. If there is real estate, it must be valued at less than $20,000 – good luck with that in California. You may also transfer property to a surviving spouse outside of probate, and there are certain assets which are not included in your estate which include retirement plans (IRA, 401(k), pensions), life insurance not payable to the estate, and any joint tenancy accounts.
There may be some unique exceptions where probate would be desirable, such as disputes between heirs whereby a Judge’s oversight and control may be needed. In most cases however probate in California is a very onerous, public and costly process.
Don’t Have An Estate Plan? You’ll Use The State’s Plan
Ever wonder what happens when you pass away in California without an estate plan? The state has a plan for you. It’s called “intestacy” and your estate is divided according to the rules laid out.
- If you have a surviving spouse or domestic partner, all community property and quasi-community property is given to that spouse/partner.
- If you pass away with separate property then your spouse/partner receive 100% of separate property if you leave no children or children of your children, parent, brother, sister or children of deceased brothers and sisters.
- This number drops to 50% if you only had one child (or children of one deceased child), or at least one parent, brother, sister or children of any of them
- This number drops further to 33% if you had more than one child, or one child and children of a deceased child, or children of two or more deceased children
That is just what your surviving spouse or domestic partner receives if you die without a will. The rules that determine what your other heirs get, if anything, are even more complicated. And if you have no heirs at all? Your assets “escheat” to the state which means they get your assets.
The point is, if you have an estate of any decent size you will want to, at a minimum, do some basic planning that directs who gets your assets upon death.
Is Your Company’s Stock Too Concentrated In Your 401(k)?
I recently came across a Wall Street Journal Article discussing how employees were “guzzling” employer’s stock in their retirement plans. The article goes on to say that employees were pulling money out of the stock market, contributing less to conservative investments such as bonds, while increasing their stake in company stock. This is a recipe for disaster who may have forgotten the lessons learned from earlier corporate collapses this decade, including Enron, Global Crossing, WorldCom and more.
I understand why you might want to invest in your employer’s stock. You work there. There is an emotional attachment to the well-being of the company you work for. Of course you think the stock price will excel. There is a good chance that your employer’s stock price has been beaten down with the stock market being down over 50% from its peak in 2007. You know the share price should be higher, and you are sure it will rise again.
Company pride is an admirable thing and may be encouraged in other areas, but not when it comes to your retirement account. You’ve heard of the term diverisification. You can diversify your portfolio across stocks, strategies (value vs. growth), or across asset classes (stock, bonds, international). You can diversifty across sectors and even different money managers. In this case you want to diversify against your employer. Yes your employer.
While the major stock market indices are down around 50% or more, some individual stocks haven’t fared so well. Employees at Lehman Brothers saw their company stock lose almost all of its value in a matter of weeks, days almost. Some companies have had their shares battered down 80% – 90%. Auto and financials were especially hit hard.
So it is not advisable to have a concentrated position in any one company, and the danger is exacerbated when that company also provides your paycheck. If something catastrophic happens, such as a bankruptcy or total implosion, you could potentially lose your job and your retirement plan in one fell swoop. It could devastate your personal finances.
I recommend taking no more than what the normal allocation to individual stocks are in your portfolio. But at the absolute maximum no more than 10%; 1-5% is more desirable. If your company offers a match if you purchase company stock, that should also be taken into consideration. If you have a high concentration now, check to see if you cannot diversify out of those shares without surrendering any matches that may not have vested yet.
Are Your Deposits Safe At The Bank?
Many have wondered whether their bank deposits were safe. The FDIC traditionally guaranteed up to $100,000 in total deposits at any one institution. In response to the banking meltdown last year they increased the guarantee up to $250,000 and then introduced the Temporary Liquidity Guarantee Program which temporarily increased protections guarantees further.
Still, when the Chairman of the FDIC says that they may run out of money this year, there is cause for concern. Indeed, if enough banks fail, the FDIC may run out of funds. Now, I wouldn’t rush out and pull deposits out. Save for a very serious meltdown still ahead, I think it unlikely we see an insolvent FDIC. But you can never rule out the possibility. But lets say your bank does fail, and the FDIC is almost out of money or close to it. You might get your money back, but it may take a while if there is a long queue in front of you. What if you need the money right away or had a big obligation due shortly?
For starters, I suggest at least keeping accounts at two different banks. If possible, keep a few months worth of expenses in each account. Also, inquire into the health of your bank. Finally, for larger amounts a brokerage account may make more sense. Short-term government funds are quite safe. Assets at a brokerage are not subject to being “lent against” by the brokerage, meaning your assets are segregated and are not used as capital for the brokerage to make loans. There is SIPC coverage and usually the broker will purchase additional insurance.
