Beneficiary Reviews: Extremely Important, but Often Overlooked

Sam Payne, RICP, VP Business Consultant


Beneficiary designations are incredibly important, but often misunderstood or not understood at all by those who are preparing to leave a legacy.  

Many people believe that a trust will handle the distribution of assets like life insurance, IRAs, retirement plans, annuities, and some employee benefit plans. In fact, these assets are all controlled by beneficiary designations. Understanding how to properly name beneficiaries, and how to avoid common mistakes in beneficiary designations, is key to ensuring that assets end up where intended.

If you don’t designate a beneficiary to receive these assets after your death, it’s possible that the assets will be distributed to someone other than who you intended. For example, some custodial
agreements will automatically default to the spouse, and if there is no spouse, then to the owner’s surviving children, and then to the estate. This is a helpful default in the case of no beneficiary designations, but it doesn’t ensure your assets will go to the person you would have chosen.

Our financial advisor role gives us an unparalleled advantage to assure that our client’s legacy intentions are fulfilled.  A simple but incredibly important part of planning is to make sure we have a conversation about those desires with our clients, and follow-up by reviewing all beneficiary designations on accounts that have a beneficiary designations possible.  The most common accounts or policies that we will have in our view include Life Insurance and Annuities. But don’t stop there.

In addition to reviewing the obvious accounts, spend some time reviewing bank checking and savings accounts, retirement accounts, bonds and investment accounts for “Transfer on Death” beneficiary designations. 

In reviewing these designations you can help your clients stay current and avoid unintended consequences. Failing to update these designations after life events such as births, marriages, divorces or other changes in relationships or family dynamics may result in either assets being distributed to unintended recipients, or failing to be distributed to someone you did intend to include but never got around to including.

Some of the common beneficiary designation mistakes, aside from not naming one at all, would include:

Naming the estate as beneficiary – while this may eventually result in your heirs receiving the assets you intended, it is not the most efficient way to do it.  This can also result in greater costs to the estate in the form of taxes and probate costs, and provides substantially less flexibility when it comes to how and when the assets are distributed.

Naming a trust as beneficiary – While this is possible, the unintended consequences of naming a trust as beneficiary for some accounts, if realized, may be substantially greater than the decedent ever intended.

For example, designating a trust as the beneficiary of an IRA can be an effective estate planning tool.  However, this already complex topic has become even more complicated by the passing of the Secure Act. It is effective only if all the parties involved—especially the IRA owner, the IRA custodian, the trustee of the trust, and any attorneys representing the beneficiary—agree on the interpretation of the provisions of the trust and applicable laws. Conflicting interpretations could result in a delay of disposition of the assets and can be quite frustrating for those involved.

Naming minor children as beneficiaries – If minor children have been named as the beneficiary of your life insurance policy, then it can become legally complicated.

Minor children cannot inherit money directly. Instead, the state would appoint a legal guardian if you hadn’t done so, which is a lengthy and costly process. That guardian would then determine how the money is managed and spent—and it may not coincide with your wishes.

If you want the money to benefit a child while the beneficiary is still a child, then you must set up a trust and appoint a trustee. The simplest way is via the Uniform Transfer to Minors Act, which is free — you just appoint a trusted, responsible adult to handle the money on the child’s behalf.

As you can see, naming beneficiaries is incredibly important, and designations should be reviewed on a regular basis.  I believe, as we approach the end of the year, the time to hold beneficiary reviews with your clients is now.  By having the conversation, you will be able to identify their wishes, educate them on the importance of proper beneficiary designations, and assure their stated desires are fulfilled. 

Is This The End of Social Security As We Know It?

Sam Payne, RICP, VP Sales, Business Consultant


Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This year’s report, absent the affect of COVID-19, is a sobering reminder of the financial situation the trust funds have been facing for years.

Since its advent in the 1930s, Social Security has provided a “safety net” for retiring Americans.  Its original intended purpose was to “lift” seniors out of poverty in their retirement years.  Today it benefits over 65 million Americans, with the bulk of those relying on their Social Security checks to provide the bulk of their retirement income.  Today it has become so much more than it was intended to be, yet the program has remained largely unchanged.

A pending Social Security system crisis has been forecast for years. Maybe this year the warning will be taken seriously.

According to the 2020 Trustees report, The Social Security program will see net cash outflows as early as next year (2021), and if the program continues without serious policy changes, the continued outflows will eventually exhaust the programs reserves.  Left unabated, this will eventually lead to dramatic benefit cuts. Below is a projected timeline for Social Security Benefit cuts.

There are many reasons Social Security is in this situation, here are a few that got us here.

  • We Are Living Longer 
    As financial planners and advisors, we highlight the risks in retirement and one of the top five is longevity, the real risk that you could outlive your income.  Well that same risk of longevity affects Social Security as well.  Just think about it.  When Social Security was established in the mid-1930s the average mortality for a male (at that time most workers were male) was just over 60 years old.  The Social Security full retirement age was 65.  Today with a mixed workforce paying into and expecting benefits, the average age expectations for workers is 79 years old. 
  • Lower birth rates
    Since inception of the Social Security program, birthrates have declined.  Social Security was designed to be funded by workers contributions – younger workers paying into the system fund retirees’ benefits.  As the birthrate declines, fewer younger workers are entering the workforce and paying into the system.  The number of younger workers relative to the growing number of retirees has fallen causing contributions that are insufficient to pay for current benefits. Currently this shortfall is being covered by the Social Security trust’s reserves.  Without action, there will come a time when these reserves are depleted.

  • Lower Immigration
    A low birthrate in the US could be offset with high immigration rates. Historically the US has benefitted from high immigration rates, and these immigrants were typically younger workers entering the workforce and paying into the system.  Immigration rates have declined sharply over the last twenty years further reducing the number of workers paying into the system.

  • Political Inaction
    Social Security is a “hot potato” for sure when it comes to the political arena, and despite 35 years of warning about a shortfall by the trustees, congress has been reluctant to develop a meaningful response to address the issue. Our current sharp and toxic partisan divide has made the political inaction more severe.

  • Low Returns
    As a bulk of the trust’s assets are required by law to consist of US Treasury instruments, recent years have been a key issue.  According to the fed, the rates will remain low for some time, further compounding the problem.

  • Covid-19
    The 2020 report does not account for the impact COVID-19 will have on the trust fund, but one can imagine with the number of individuals out of work (not paying into the system), there will be a substantial impact reflected in next years report.  This impact could come from increased mortality among COVID-19 benefit recipients, continued unemployment, and lower immigration.

So what are the solutions?

  • Tax increases
  • Benefit cuts
  • Early claiming age increase
  • Full retirement age increase
  • Adjust the cost of living increase

What to do?

At the end of the day, the Social Security system we know today is in peril. We don’t know for sure when or how it will change, but the likelihood is that Social Security will not look the same 10 -15 years from today.  So how do you communicate with your clients and prospects?

I suggest communicating to three groups with a different yet similar message.  

  • Currently enjoying retirement
    • This group is unlikely to be affected by changes, historically benefit cuts have fallen on those who retire after the cuts are made.
    • Nevertheless, a financial review with a budget and income projections incorporating both Social Security and other sources of income is always prudent.
    • This conversation should encompass the five major retirement risks

  • Near and looking forward to retirement
    • This group needs your help.  A timing discussion around claiming Social Security is paramount.  
    • Keeping an eye on any retirement or claiming age changes and adjusting the plan accordingly is the smart thing to do.  
    • In addition, developing a plan that incorporates any changes in the taxation of benefits is key

  • Working hard, loving life and years from retirement
    • This group 15 -20 years from retirement bears the bigger potential of adverse effects of the Social Security insecurity.
    • Help them develop a plan for their future
    • Model several scenarios that include the different benefit levels that are being discussed and published
    • Help them recognize the importance of starting their own retirement income plan now.

Bottom line, Americans need our help!  Helping them identify the real and present risks to the retirement of their dreams.  We have the tools, the strategies and the techniques to educate, collaborate, plan and help build a retirement plan to live for!

Now is the time to have Social Security educational events, highlighting the 2020 report and offering planning solutions!


https://www.ssa.gov/oact/trsum/

https://www.macrotrends.net/countries/USA/united-states/life-expectancy

The New Retirement Reality

Sam Payne, RICP, VP Sales, Business Consultant


In the midst of the battle to quell the spread of the COVID-19 virus, and the resulting economic fallout, we are beginning to hear warnings of the longer-term impact to our financial markets.  Articles like the ones referenced below clearly point to more subdued equity returns over the next decade:

Opinion: Bulls just won’t believe what interest rates are saying about U.S. stock and bond returns for the next 5 years

and 

Expected Equity Market Returns For The Next 10 Years (Part 2)

This is without a doubt problematic.  Retirees are in a predicament.  Stocks are trading at high levels and interest rates are low, so savings accounts aren’t producing income. Meanwhile, Americans are living longer, without pensions, and many will need some form of long-term care. After a tremendous run, Wall Street has tempered expectations for stock and bond market returns for the next decade.

These muted returns being forecast are not something new.  Even before the effects of COVID, lower returns were being forecast. Over the last several years I have referred to the Morningstar Long-Term Economic outlook for guidance.  This annual article polls a number of asset managers to get a sense of what the industry’s stalwarts are planning for and forecasting.  As you can imagine, each year there is a wide variance in the expected returns.  If you are to take an average of the 6 -7 prognostications each year you will see that the current article points to about a 2.7% average annual rate of return (if we assume a 2% inflation rate to convert nominal to real and vice versa). 

Annexus has recently created a very well done video and white paper with their research. These pieces point to returns that are closer to 4% over the next decade.  Take a moment to watch this video:

Annexus Insights

You can get a copy of the whitepaper by reaching out to your Business Consultant.

The point is, there’s plenty of evidence that we could be in for a dramatically lower return scenario for the next decade.  

So we come to the new retirement reality.  As part of our long successful seminar series describes, one of the five major risks all retirees face is market or sequence of returns risk.  The real risk is that prior to and during retirement years the financial markets will behave in a fashion detrimental to maintaining and sustaining an income to support the retiree’s lifestyle. Our goal is to identify and help individuals manage these risks, and when it comes to risk there are only four ways to manage it.  

  1. Avoidance
  2. Reduction (or mitigation)
  3. Transfer
  4. Retention.

So how can we, as Financial Professionals, help?  Well each one of you appointed with Asset Marketing Systems, by virtue of the fact that you have an insurance license, has one of the best risk management tools there is available to you.  Insurance – Risk transfer!  What if you were to highlight the models and provide a solution that transfers the risk by getting a better than anticipated or even a guaranteed growth for income producing destined assets?  

As an example, you can propose an FIA income rider with a guaranteed roll up of 9% -10% simple, or 7% compounding, contrasted with a 3.5% – 4% equity market return over the next ten years.  For someone ten years from retirement, knowing their “income base” is growing at a guaranteed rate takes a lot of pressure off, and when you couple this strategy with a diversified, managed portfolio, you start to incorporate all four aspects of risk management in a single financial plan.

The bottom line is there’s a real risk that market/sequence of returns over the next ten years could have a detrimental effect on retirees, and you have the tools to help manage this risk.  It’s up to you to educate yourself and communicate with your clients and prospects about how you can help.  

Watch Sam Payne’s webinar for a deeper dive into this specific conversation. 

Register Here

SECURE Act Provisions

Sam Payne, RICP, CLTC – Vice President, Business Consultant
(Asset Marketing Systems)


December 20th of 2019, president Trump signed into law the “Setting Every Community Up for Retirement Enhancement Act” or the SECURE Act.  I see this Act as an effort to make sure American Retirees have the tools available to do exactly what retirement accounts are intended to do, provide income.  Annuities, and the guaranteed income they provide, can play a pivotal role in the success of a retiree’s income plan.  When Americans enter that permanent state of unemployment, called retirement, these products can and do help provide the paycheck or income needed to meet normal as well as emergency expenses. 

In addition to offering a safe harbor provision allowing annuities in 401K plans, the act makes substantial changes to the RMD age as well as the ability to contribute to an IRA after 70 ½. To pay for these benefits, it seems, the act also dealt a death blow to what is known as the “stretch” or “multi –generational” IRA.  Non-spousal IRA’s must now be liquidated within 10 years of the owner’s death.

This Act became law on Jan 1st 2020.  Below I highlight some key provisions of the act and provide five solutions and opportunities.

Key Takeaways:

  • Repeals the maximum age for traditional IRA contributions, which is currently 70½.
  • Increases the required minimum distribution (RMD) age for retirement accounts to 72 (up from 70½).
  • Allows long-term, part-time workers to participate in 401(k) plans.
  • Offers more options for lifetime income strategies by providing a Safe Harbor provision allowing plan sponsors to include Annuities in 401K plans.
  • Permits parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses.
  • Allows parents to withdraw up to $10,000 from 529 plans to repay student loans.

Here are 5 Solutions and Opportunities to Consider:

  1. Re-Evaluate Beneficiaries
  • Spousal rollovers can be more valuable for tax-deferral
  • If you listed a trust as a beneficiary, review immediately
  1. Tax Bracket Management
  • Maximize low tax brackets
  • Qualified Charitable Distributions if you are charitabily inclined
  1. Examine Roth Conversions
  • Current lower rates under the Tax Cuts and Jobs Act are scheduled to sunset after 2025
  • Those close to RMD age have an additional 2 years from ROTH conversions
  1. Life Insurance as an estate and tax planning vehicle
  • Can replace all of the benefits of a stretch IRA and IRA trusts
  • Less tax for beneficiaries
  1. Avoid Trust Tax Rates by All Means
  • Highest trust tax rate at present is 37% for income over $12,950
  1. Highlight the benefits of FIA’s and their income riders 
  • Show those close to retirement that annuities are already available outside their 401K
  • Illustrate income that can be generated at their retirement age

Download the SECURE Act Summary PDF


These are some suggestions, and as always reach out to your Business Consultant here at AMS with any questions, comments or concerns you may have.