Depending on where you work, you may receive employer-provided benefits in addition to your salary or hourly wages. The most common types of employee benefits are life insurance, retirement plans, and, in some cases, a pension. These benefits can vary significantly depending on if you are employed by a private company or you are employed by the state or federal government. Many people take these benefits for granted and fail to adequately coordinate them with their individual estate planning goals.
Employer-provided life insurance policies (group life insurance) will typically have a death benefit equivalent to your salary, and in some cases the death benefit may be 2 or 3 times your salary. Depending on your debt, family size, and overall wishes, the death benefits are often insufficient for your needs and really should only be considered supplemental in nature. Identifying the appropriate amount of life insurance death benefit is particular to your wants and needs and should be discussed with a licensed insurance professional. Most group life insurance policies are guaranteed issue, meaning that you will be eligible regardless of your health and medical history. If you find yourself leaving your current employer (and benefits), most group life insurance policies will not transfer with you, and you must seek an individual policy. Unfortunately, individual life insurance policies are not guaranteed issue, and your individual age and medical condition will impact your premium costs and even insurability.
Your employer may also provide a retirement plan to which you can contribute a pre-tax portion of your salary. In many instances, the employer will match your contributions (typically up to three percent of your salary/wages). One of the most common retirement plans is the 401k, but there are many other options like the 403b, SEP, 457, Thrift Savings Plan (TSP), and the SIMPLE IRA to name a few. Retirement plans are different than group life insurance policies because you can transfer the balance of your retirement plan when you change employers. In some cases, your employers’ contributions have not “vested,” and your employer will retain their contributions to your plan because you have not worked for the company for a sufficient amount of time.
Although less common these days, some employers provide a pension to their employees after they have maintained employment for a certain duration. These pensions provide a stream of income for the pension recipient for a set number of years or for their lifetime. In most instances, pensions cannot be redirected into a Revocable Living Trust or to a named beneficiary. One key exception is a surviving spouse can sometimes be named as a pension beneficiary. At the death of the original pension recipient, their spouse can continue receiving the pension benefit.
Estate Plan Coordination
Depending on the type of estate plan you have, the steps to coordinate your employer-provided benefits will differ. When a Last Will and Testament is used, most people will rely on beneficiary designations to identify specific people as recipients of their life insurance death benefits or retirement plans. Thankfully, utilizing beneficiary designations will often circumvent the probate process. Avoidance of probate is very important with the average probate timeline lasting between 9 months and 2 years, and the average cost running between 3 to 5 percent of the assets. Unfortunately, naming a person as a direct beneficiary doesn’t provide any protections or assurances. For instance, naming an immature 18-year-old as a beneficiary will get the funds to them outside of probate, but very few people make prudent financial decisions at that age and the money will likely be squandered. Similarly, if a beneficiary received assets directly and then commingled the assets with their spouse, a divorce could result in the loss of the inherited assets.
When a Revocable Living Trust (RLT) is used, the trust can be named as a beneficiary of life insurance as well as retirement accounts. It cannot be emphasized enough that the decision to name a trust as a beneficiary of life insurance or retirement accounts must be made with the advice and guidance of an estate planning attorney. Depending on the circumstances, naming a trust as a beneficiary can dramatically impact both taxes and the beneficiaries. Passing assets into RLTs can protect beneficiaries from making inappropriate financial decisions and can also shelter assets from divorce. It should also be noted that any beneficiary receiving needs-based government benefits like SSI or Medicaid (commonly referred to as a special-needs beneficiary), should not be left assets directly as the distribution will likely disqualify them from their government benefits. An RLT can be used to shelter assets for a special-needs beneficiary and will not disqualify them from their needs-based benefits.
There are many dynamics involved in evaluating the most efficient and effective manner of passing assets at death. Any estate planning conversation should always include discussing the estate assets, including any employer-provided benefits. If you have questions regarding the designation of your assets, please contact Johnson, Gasink, and Baxter, LLP to set up an appointment with one of our estate planning attorneys.
DID YOU KNOW?
Did you know that the attorneys at Johnson, Gasink and Baxter, LLP routinely teach classes to local organizations, businesses, and churches on estate planning? In just the last few months, JGB attorneys have worked closely with a number of human resource directors to better educate company employees on estate planning and how to best utilize the company’s employee benefits.
If you have an organization, business, or church that you would like a JGB attorney to come and speak with, please contact Brooke Heilesen directly at 1 877 790 4555.