Common Mistakes when Making Beneficiary Designations

Beneficiary designation mistakes prevent assets such as retirement and life insurance accounts from going to the right beneficiaries.

No matter what kind of estate plan you use, your plan can be undone by some common mistakes when making beneficiary designations.  Modern banking and worker economics also means that a lot of your financial value, usually in retirement accounts like IRAs or 401(k)s for example, are governed by beneficiary designations.  That means one mistake affects a huge portion of your financial worth.   Many events make it necessary to review beneficiary designations, as the author in the article “One Beneficiary Mistake You Really Don’t Want to Make” from Kiplinger points out.

Now, there is no definitive guide on how to handle beneficiary designations.  The best solution is to review them with your estate planning attorney to ensure the designations fit your estate plan.  However, this article will cover some common mistakes that can undo even the best of estate plans.  You may also want to review some common estate planning mistakes as they somewhat overlap.  See here for more info:  https://www.galliganmanning.com/what-estate-planning-mistakes-do-people-make/ 

Life Changes.  Any time you experience a life change, including happy events, like marriage, birth or adoption, or unhappy events such as the death or disability of a loved one, you need to review your beneficiary designations.  If there are new people in your life you would like to leave a bequest to, like grandchildren or a charitable organization you want to support as part of your legacy, your beneficiary designations will need to reflect those as well.  A very common and likely very obvious mistake is to not review and update your beneficiary designations after one of those events.

For people who are married, their spouse is usually the primary beneficiary, but do you have a contingent? Beneficiary designations typically have multiple tiers.  The first person to receive is the primary beneficiary.  For married couples, this is typically the other spouse.  However, many clients forget to include contingent beneficiaries to receive if the primary is deceased.  Children are often contingent beneficiaries who receive the proceeds upon death if the primary beneficiary dies before or at the same time that you do.  But, a lack of a beneficiary is a big problem and many companies direct to the proceeds to your estate, which I’m guessing isn’t what you wanted.

It is also wise to notify any insurance company or retirement fund custodian about the death of a primary beneficiary, even if you have properly named contingent beneficiaries, or even better, just update the beneficiary designation to remove the deceased beneficiary’s name.

Not understanding the financial institution’s terms.  Clients often ask what will happen if a named beneficiary of their retirement account dies.  Who does it go to next?  I always have the same answer, what do the account policies say?  For example, let’s say you’re married and have three adult children. The first beneficiary is your spouse, and your three children are contingent beneficiaries. Let’s say Sam has three children, Dolores has no children and James has two children, for a total of five grandchildren.

If both your spouse and James die before you do, all of the proceeds would pass to who?   It could be your two surviving children, and James’ two children would effectively be disinherited. That might not be what you would want. It is also possible that the assets go to the children of the predeceased child.

The difference between these are the difference of what are typically termed per stirpes and per capita.   Some companies allow you to indicate your preference, but not always.   So, you’ll need to speak with the company to better understand how their designations are ruled.

Not incorporating into your estate plan.  Finally, and I made this point briefly in the introduction, you want to coordinate your beneficiary designations and your estate plan.  For example, many clients utilize trusts for their beneficiaries to provide them creditor and divorce protection.  If your life insurance policy goes directly to your child, that money will not receive the creditor and divorce protection the trust affords.  So, arranging the beneficiary designations so that the insurance proceeds will go to that trust protects that money as well.

These are some common mistakes in making beneficiary designations.  Your estate planning attorney will help review all of your assets and means of distribution, so your wishes for your family are clear and effective.

Reference: Kiplinger (March 23, 2021) “One Beneficiary Mistake You Really Don’t Want to Make”

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How Does a Special Needs Trust Work?

Special Needs Trusts hold assets for an individual using government benefits to provide for them without losing the benefits.

Clients uses trusts for a lot of reasons, including probate avoidance, creditor protection, privacy and smooth and efficient estate administration.   Some trusts, such as Special Needs Trusts (aka Supplemental Needs Trusts) are used specifically to maintain government benefits for the beneficiary while still providing for their needs.  Not using the right type of trust can lead to financial devastation explains the article “Take special care with Special Needs trusts” from the Herald Bulletin.

The purpose of a Special Needs Trust is to help people because they have a disability and are or may be supported by government benefits.  Most of these benefits are means-tested, meaning, a beneficiary’s eligibility is dependent upon their income, assets or potentially both.  The rules regarding the benefits are very strict. An inheritance may disqualify a person with a disability from receiving these benefits, possibly putting them in dire circumstances.

However, clients may still want to provide for that loved one, and the Special Needs Trust is the way to do it.  The value of assets placed in a Special Needs Trust does not count against the benefits.  However, this area of the law is complex, and requires the help of an experienced elder law estate planning attorney. Mistakes could have lifelong consequences.

The trustee manages assets and disperses funds on a discretionary basis.  Selecting a trustee is extremely important, since the duties of a Special Needs trust could span decades. The person in charge should be ready to work with competent advisors who are familiar with the government programs and benefits and who can advise the trustee of the consequences of disbursements.

These are just a few of the considerations for a trustee:

  • How should disbursements be made, balancing current needs and future longevity?
  • Does the request align with the rules of the trust and the assistance program requirements?
  • Will anyone else benefit from the expenditure, family members or the trustee? The trustee has a fiduciary responsibility to protect the beneficiary, first and foremost.

Parents who leave life insurance, stocks, bonds, or cash to all children equally may be putting their Special Needs child in jeopardy.  What’s more, children who try to provide for their parents often don’t consider that their parents may require governmental assistance at the end of their lives such as long term Medicaid.  Well-meaning family members who wish to take care of their relative must be made aware of the risk of leaving assets to an individual with disabilities, and in fact, good planning suggests including contingent Special Needs Trusts in your estate planning documents.  After all, a loved one might not have a disability when you create your estate plan, but they might by the time they receive from your estate plan.

An experienced elder law or estate planning attorney will be able to create a Special Needs trust that will work for the individual and for the family and can advise you how to include such planning in your estate documents.

Reference: Herald Bulletin (March 13, 2021) “Take special care with Special Needs trusts”

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Can I Revoke a Power of Attorney?

I wanted to cover something of a follow-up to last week’s blog entry entitled Why Won’t My Power of Attorney Work which you can find here: https://www.galliganmanning.com/why-wont-my-power-of-attorney-work/.  In that article I talked about limitations to powers of attorney and scenarios when they won’t work or at least not well.  In this article, I want to briefly address how to revoke a power of attorney.  The recent article from nwi.com entitled  “Estate Planning: Revoking a power of attorney” also addresses this topic.

A Power of Attorney (POA) is a document that allows another person to act on your behalf. The person designated is referred to as the “Attorney in Fact” or the “Agent.”  However, sometimes a family faces difficulty because the choice of agent no longer makes sense, or perhaps was only needed for a brief time.  Even worse, the family may determine the agent is a bad actor whose authority needs to end.

If the creator of the POA wants to revoke it, they have to do so in writing.  They should also identify the person who is to be revoked as the POA and must be signed by the person who is revoking the POA.

Here’s the tricky part: the agent has to know it’s been revoked.  Unless the agent has actual knowledge of the revocation, they may continue to use the POA and financial institutions may continue to accept it.  If you are revoking a power of attorney because the agent isn’t suitable or a bad actor, you have a problem.  You can’t slip off to your estate planning lawyer’s office, revoke the POA and hope the person will never know.

Another way to revoke a POA, and this is the preferred method, is to execute a new one. In most states, most durable POAs include a provision that the new POA revokes any prior POAs. By executing a new POA that revokes the prior ones, you have a valid revocation that is in writing and signed by the principal.

If you already had an acting agent and you created the new POA, send them a copy and retain proof that you did so to demonstrate they were aware of the new POA and new appointment.

If the POA has been recorded for any reason such as use in a real estate transaction, the revocation should reference that fact and should be recorded just as a new POA would be filed to replace the old one. If the POA has been provided to any individuals or financial institutions, such as banks, life insurance companies, financial advisors, etc., they will need to be properly notified that it has been revoked or replaced.

Two cautions: not telling the bad and having her find out after the principal has passed or is incapacitated might be a painful blow, with no resolution. Telling the person during lifetime and before there are issues is a good idea. A diplomatic approach is best: the principal wishes to adjust her estate plan and the attorney made some recommendations, this revocation among them, should suffice.

Talk with your estate planning lawyer to ensure that the POA is changed properly, and that all POAs have been updated.

Reference: nwi.com (March 7, 2021) “Estate Planning: Revoking a power of attorney”

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