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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Twelve Reasons to Update your Estate Plan

Clients know they are supposed to review their estate plans, but don’t know when to do it. Here are twelve times when it makes sense to review your plan.

Estate planning lawyers hear it all the time—people meaning to update their estate plan, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who don’t think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will or trust is so out-of-date that it creates a world of problems for a grieving family.  For the purposes of this article I’ll focus on property planning, meaning wills and trusts, but there are lots of other reasons to review and update your entire estate plan.

There are some wills and trusts that do stand the test of time, but they are far and few between. An obvious example is that some people shift from wills to trusts as their primary estate planning vehicle.  Families also undergo all kinds of changes, and those changes should be reflected in the will or trust. Here are twelve times in life when wills and trusts need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will and trust should be flexible to accommodate additional children in the future.  In some cases, a new child may disrupt the estate plan if no provisions are made for them.

Divorce is a possibility. Don’t wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your estate plan, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you didn’t do it before, update your estate plan now. Don’t neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts for your beneficiary, so anything you leave your child will be protected in the case of their divorce.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your estate plan to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance for both themselves and for later beneficiaries.

Named executor, trustee or beneficiary dies. Your old will or trust may have a contingency plan for what should happen if a beneficiary, executor or trustee dies, but you should probably revisit the plan. Many times, clients have one answer for what happens if a fiduciary or beneficiary die while it is hypothetical, but feel differently once it happens.  If a named executor or trustee dies and you don’t update the estate plan, then what happens if the second dies?

A young family member grows up. Most people name a parent as their executor or trustee, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.  This is one of the most obvious and common reasons for a younger client to update their estate plan.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.  It is also a great idea to subscribe to legal blogs (like this one) to stay up to date on changes.

An inheritance, windfall or downfall. If you come into a significant amount of money, your tax liability changes. You’ll want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will and/or trust? If you can’t find the original documents, especially with the will, then you need new documents. Copies of wills may only be probated with extra steps, so it is far better to redo the documents which will also serve to update it legally.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.  It is also worth considering changes if you acquire real property in a new state which may require probating in two states.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

In all cases, it is important to review your estate plan every few years, but looking for these reasons to update our estate plan will help.  Changing your estate plan is also not as involved as one might think.  Changes to wills often require a new will, changes to trusts take a variety of forms (see here https://www.galliganmanning.com/amending-a-trust-what-are-your-options/) but are often not very involved.

If you haven’t reviewed your estate plan recently or need assistance with a review or updates, please call our office today.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

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