The Trump Card of Estate Planning: Naming a Beneficiary
One of the most basic elements of an estate plan is to name a beneficiary for your assets. As you can see from the article below, one of the most common mistakes is to create a will and then not do anything else for your other assets. As is prevalent in second marriages, one spouse will always have “good intentions” to change their beneficiary designations, but won’t get around to actually doing it.
We see it all the time. We have plenty of clients that come in distraught because their expected inheritance is going to someone else. So, we make it a regular part for our clients to have the correct beneficiary designations in Leawood. This way, the entire estate plan works together.
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The trump card of estate planning: naming a beneficiary
By MARC A. HEBERT
Estate planning can be a topic that elicits many different feelings about life and death. This is not usually something people in New Hampshire and elsewhere like to think about. But to illustrate the importance of prior planning and execution of a carefully crafted plan, I’m going to offer a story about a real situation that happens too often.
It begins with a frantic call to the family lawyer by a recent widow, whom I’ll call Sally. Sally had just learned her deceased husband John’s life insurance proceeds were going to be paid to his ex-wife. As John’s current wife, shouldn’t Sally be entitled to the life insurance proceeds? John had changed his will to make Sally the beneficiary of his estate. Doesn’t this change the policy designation as well?
As Sally found out from her lawyer, beneficiary designations are the trump card of estate planning. The ex-spouse will receive the life insurance proceeds because in certain financial instruments, beneficiary designations control the asset disposition regardless of other provisions, such as what’s dictated in a will or trust.
You have the option of naming a beneficiary on a wide variety of financial products. While these types of designations are standard on life insurance policies, annuities and retirement accounts, you can add them to other assets.
For example, bank accounts can have a payable on death (POD) designation, and brokerage accounts usually have a transfer on death (TOD) option. The POD and TOD serve as an alternative to titling the asset in one person’s name, because the main advantage of an asset with a beneficiary designation is it avoids probate.
Remember that if no beneficiary is designated, defaults are in place, such as payment to your estate for nonretirement assets or according to the administrator’s plan document in the case of retirement accounts. This could mean your heirs will need to go through the time-consuming and costly probate process. For retirement accounts, it also could mean unwieldy income tax ramifications.
Beneficiary designations are easy to lose track of or forget about entirely. Periodically reviewing your beneficiary designations is one of the most important concepts of estate planning. Making changes to your will or trust will not automatically make changes to all your assets referred to in those documents. So, it is important that your beneficiary designations are updated and coordinated with your overall estate plan.
As you review the designations, make sure you name primary and contingent beneficiaries. It’s best to avoid naming minors, profoundly disabled people, and in most instances, your estate as a beneficiary. For example, leaving assets outright to a minor means the court will appoint someone to supervise the funds, which is an expensive and cumbersome process. Instead, these are circumstances that may benefit from the creation of a trust, or supplemental needs trust in the case of a disabled person. The trust will then be listed as the beneficiary. In doing so, it gives the flexibility of avoiding probate, but the terms contained in the trust dictate how the asset is ultimately distributed. These are certainly scenarios where you want to consult a qualified estate planning attorney.
When making changes to your designations, it’s best to confirm with the receiving institution that the changes were actually made and reflect your wishes. Also, keep copies of your beneficiary documentation because it might be years before they are needed and the institution might not be able to locate the paperwork.
The inspirational Randy Pausch, known for his “Last Lecture,” remarked “we cannot change the cards we are dealt, just how we play the game.” So use that trump card to your advantage!
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