Keeping Beneficiary Designations Up to Date

If you don’t know who your beneficiaries are, then it’s time for a beneficiary designation check. Even if you think you remember, every now and then, they should be checked, according to an article “Are your beneficiary designations up to date?” from Community Voice.

It has become very common for estate plans to be largely controlled through beneficiary designations.  Many people accumulate wealth in 401(K)s or IRAs which pass to named beneficiaries, or clients add named beneficiaries at the suggestion of a banker to avoid probate.  With so many beneficiary designations controlling so many accounts and so much wealth, it’s critical to make sure they reflect your wishes.

I even had a law school professor who suggested one of the worst estate planning mistakes was failing to address beneficiary designations!

Your choices may change with time. When did you open your very first IRA? Do you even remember when you purchased your life insurance policies? If it was back in the 1990s, chances are good the people in your life have changed, as well as your priorities. Your kids are likely grown, or maybe you have more of them!  Maybe one of your beneficiaries has developed some bad habits, and you want to control how the money will impact them.  There are lots of reasons beneficiary designations don’t fit anymore.

When we first filled out the beneficiary designations, we were all confident they’d be the same forever, but time and life have a way of changing things. In five, ten or twenty years, big changes may have happened in your life. Your beneficiary designations and your estate plan need to reflect where you are now, not where you were then.

The best way to address beneficiary designations is reviewing them with your estate plan annually.  If you’re still working, your employer may have changed custodians for your retirement plan and your insurance policy. When a new custodian takes over, sometimes beneficiary designations can get lost in the change, that has happened many, many times.  I’ve also seen companies say they won’t honor beneficiary designations because of internal policy changes.

Life events can also affect your beneficiary designations.  Did you get divorced?  I’d imagine you don’t want your ex as the beneficiary of your accounts.  Do you have minor beneficiaries?  You want to name a custodian of that money in the account plan as part of your designations, otherwise your loved ones are headed to guardianship court.

If you don’t have a beneficiary designation on these accounts, or any account where you have the option to name a beneficiary, you may have a bigger problem. The tax-focused part of your estate plan could be undone if you thought your 401(k) would go to your spouse but your spouse predeceased you.

What’s the best way to handle this?  Make sure your designations coordinate with your estate plan.  What most people don’t realize is that whatever choice you make on the beneficiary designation overrides anything in their estate plan because it passes right to that beneficiary.  That sounds good, but notice most of the problems I’ve recounted are because your circumstances change, or contingencies aren’t adequately planned for.  You also have no control over the contingencies if a named beneficiary should pass away and you failed to address it in the designations.

Your estate plan can cover all of this, which is why directing assets to your estate plan via beneficiary designations might be a great idea.  Everything will go to the persons you intended, but the estate plan will help bypass all of these problems.

Moral to the story, don’t rely on beneficiary designations and make sure you keep them up to date and coordinating with your estate plan to ensure your assets pass to your beneficiaries as you intended.

Reference: Community Voice (September 30, 2022) “Are your beneficiary designations up to date?”

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Top 10 Success Tips for Estate Planning

Unless you’ve done the planning, assets may not be distributed according to your wishes and loved ones may not be taken care of after your death. These are just two reasons to make sure you have an estate plan, according to the recent article titled “Estate Planning 101: 10 Tips for Success” from the Maryland Reporter.

There are several other key tips for estate planning for you to consider, here are 10 of them:

Gather Asset Information.  This should include all your property, real estate, liquid assets, investments and personal possessions, and not just assets you think your Will will control, gather it all.  With this list, consider what you would like to happen to each item after your death. If you have many assets, this process will take longer—consider this a good thing. Don’t neglect digital assets. The goal of a careful detailed list is to enable your fiduciaries to quickly identify, gather and ultimately distribute your assets.

One more key thing, put this list in a place that’s accessible.  Don’t assume technology will make that possible as an era of passwords and high security, although great in most contexts, makes accessibility difficult for your family.  Instead, consider sharing information with them in advance so they are prepared to deal with this.

Meet with an estate planning attorney to create wills and/or trusts. These documents dictate how your assets are distributed after your death. Without them, the laws of your state may be used to distribute assets. You also want to pick the person whose job it is to wind-up your affairs, and these documents name the person responsible for carrying out your instructions.  If you already have estate planning documents, you should have them reviewed from time to time as clients sometimes out grow their estate plans, or have better options on how to accomplish their goals.

Anecdotally, I participate in estate-related study groups, message boards and other groups in which lawyers workshop estate problem.  The hardest cases to figure out and the hardest cases to get a satisfactory conclusion for are very typically cases where no estate planning was done.

If you don’t have an estate plan and want ideas on how to start the process, see this article:  https://galligan-law.com/how-to-begin-the-estate-planning-process/

Guardians for minors, the person who will raise your minor children if you should pass.  You can nominate who will serve as their guardians.

Beneficiaries named?  Now, very frequently people tell me in consultations that they don’t need an estate plan, because they have beneficiaries named on all of their assets. That is virtually never true, however, for this list’s purposes, I say it is worth reviewing which assets should name beneficiaries (e.g. life insurance or retirement funds) and confirm they match what you want.

One of the difficulties with beneficiary designations is that they are like old estate plans, people set them, and then never change them.  I’ve seen ex-spouses left on them, mistakes like naming only one child to receive everything because they will “do the right thing,” not having contingencies if the named person predeceased, and so on. They also write their own rules on contingencies.  So, if you leave your IRA to 3 named children, but one of them is deceased, their portion may go to their siblings, or maybe their children, or even possibly your estate.  The answer lies in the plan documents, so it is important to consider them in your estate plan.

Also, clients may have excellent wills that address all form of concerns.  But, then names one child as beneficiary of their assets.  That typically means the will has to be probated (did you have a beneficiary on your house?), but zero cash to fund it.  That is not an enviable position for the executor.  Plus, if the will establishes trusts, plans for minors or incapacitated beneficiaries, or any of the many other problems you can proactively plan for, but the asset goes directly to a person instead, all of those protections and solutions were circumvented.  So, speak with your estate planning attorney to ensure the beneficiary designations work with your estate plan.

Make your wishes crystal clear. Legal documents are often challenged if they are not prepared by an experienced estate planning attorney or if they are vaguely worded. You want to be sure there are no ambiguities in your will or trust documents. Consider the use of “if, then” statements. For example, “If my husband predeceases me, then I leave my house to my children.”  This is especially true in contingencies, which I’ve found people typically haven’t considered.

Trusts may be more important than you think in estate planning. Trusts allow you to take assets out of your probate estate and have these assets managed by a trustee of your choice, who distributes assets directly to beneficiaries. You don’t have to have millions to benefit from a trust.  I’ve written extensively about the benefits of trusts, so you can find several articles elsewhere on that topic.

List your debts. This is not as much fun as listing assets, but still important for your executor and heirs. Mortgage payments, car payments, credit cards and personal loans are to be paid first out of estate accounts before funds can be distributed to beneficiaries. Having this information will make your executor’s tasks easier.

Plan for digital assets. If you want your social media accounts to be deleted or emails available to a designated person after you die, you’ll need to start with a list of the accounts, usernames, passwords, whether the platform allows you to designate another person to have access to your accounts and how you want your digital assets handled after death. This plan should be in place in case of incapacity as well.

Plan for Incapacity.  All too often, clients only think of estate planning in the context of their passing.  That is of course part of it, but sometimes it is even more critical to consider incapacity.  What happens with your assets if your health doesn’t permit you to handle your own finances?  Who would speak for you?  Do you want them to do whatever they want, or do you want to give them direction?  This is extremely important as it directly affects your well-being as this person will pay for your daily needs and medical expenses.

Plan for Long Term Care. The Department of Health and Human Services estimates that about 70% of Americans will need some type of long-term care during their lifetimes. Some options are private LTC insurance, government programs and self-funding.

The more planning done in advance, the more likely your loved ones will know what to do if you become incapacitated and know what you wanted when you die.

Resource: Maryland Reporter (Sep. 27, 2022) “Estate Planning 101: 10 Tips for Success”

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Leaving Inheritance Unequally to Heirs

Clients occasionally ask to create estate plans leaving property to beneficiaries who are not their natural heirs (next of kin). When they do, it might be because of estrangement, or because of the involvement of that heir’s family (think in-laws), because one of the heirs doesn’t need the money, because of how they might spend once received or because they do not have close natural heirs.  When it comes to estate planning, equal isn’t the same as fair, explains the article “Are Unequal Inheritances Fair?” from Advisor Perspectives.

The first will I ever drafted as a law student had this issue.  The elderly mother wanted to leave everything she had to two of her four children.  The two she wanted to provide for lived far away, had very few assets, but still helped mom with her bills or spent time with her.  The two remaining children were much better off, but also spent far less time with her despite living in the same city.

She loved her children equally, but recognized that the value of the inheritance was different for the children who supported and who were in need compared to the two who did not support her and were self-sufficient.  In her case, I drafted the will leaving everything to the two supportive daughters, and we used ethical will language to explain the reason why she didn’t leave everything to all four. (see here for info on an ethical will: https://galligan-law.com/estate-planning-attorneys-recommend-that-clients-consider-writing-an-ethical-will-or-legacy-letter/)

But, that solution doesn’t always work, especially where the heirs don’t get along, or would become suspicious of each other.  This is exacerbated where a child is being cut out for reasons like substance abuse or family difficulties.  So, here are a few things to consider when removing a natural heir from your estate plan or substantially reducing their share.

Be Direct. Clients often are worried about hurting the feelings of the heir they cut out, and so don’t want to be direct.  I handled an estate of a client who reduced the share of one child compared to the other.  This was a very complicated estate, and the attorney who prepared the last estate plan made a subtle change in a very complex document so that one child wouldn’t get a particular trust fund and the other would.

The estate turned out better than anticipated, but the problem with a subtle cutting out is the child doesn’t believe its true or that is what their parent wanted.  They don’t believe mom or dad made this choice, and instead they believe the other child (who typically is going to be the executor in this situation) is cheating them, unduly influenced them, the attorney made a mistake or that mom or dad lost capacity.  This leads the fight directly from one beneficiary to the other.

Instead, being clear and direct about your intentions directs the beneficiary’s focus on what you wanted (which is where estate planning should be focused) instead of looking for ways they wronged.  The law allows you to leave the property to whom you want, so better to be clear about your intentions then to leave your family to fight over it.

Use a Trust. The value of the trust in this situation varies a bit amongst the states, but generally stated, using a trust is better than a will when not leaving everything to your natural heirs.  Wills are very public, and depending on your state may require notice to your heirs, whether or not they are a beneficiary.  Trusts can both make the administration more private and can avoid fighting.  Trustees also often have more power to close the trust or handle disputes than an executor who is handling a will.

Leave Property in a Different Way. In some cases, clients want to remove a beneficiary because of a concern over the child’s receipt of assets.  For example, if a child is bad with finances, has creditors, a messy marriage, substance abuse issues and so on.  It is a situation where the emphasis isn’t “I want to leave everything to two of my three children,” but an instance where “I don’t want to give one money, so it has to go to the other two.”   In this case, it’s possible that you could still leave the difficult child an inheritance, but do so in a way to protect the inheritance and the beneficiary from the money.

For example, I have regularly written blogs about leaving inheritance in trust for a beneficiary and we regularly draft estate plans using them.  If the problem is spending habits or addiction, you could leave the inheritance to a child in a trust and leave someone else in charge of the trust.  That trustee could spend the money on their behalf so that the beneficiary receives the value of the inheritance without direct control, which is where the problems arise.

Similarly, beneficiaries who have disabilities and may use government benefits could receive a trust which keeps the assets outside of their control (so not countable for their benefits) but is still available should they need it.  Likewise, leaving property in a trust to a child where you are concerned about divorce helps protect the property by keeping it separate from the marriage.

You can see this article for more details and ideas on how trusts help beneficiaries:  https://galligan-law.com/protecting-inheritance-from-childs-divorce/

In sum, the reason a client wants to remove a beneficiary might be addressable in a different way so that they can still receive their inheritance.

None of these are perfect solutions, but are worth considering for your family if you wish to remove or reduce an heirs share.

Reference: Advisor Perspectives (Aug. 22, 2022) “Are Unequal Inheritances Fair?”

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