Surprising Ways Beneficiary Designations Can Damage an Estate Plan

Naming a beneficiary on a non-retirement account can result in an unintended consequence—it can even topple an entire estate plan—reports The National Law Review in the article “Overuse of Beneficiary Designations: How They Can Derail a Client’s Estate Plan.” How is that possible?

In most cases, retirement accounts and life insurance policies pass to beneficiaries as a result of the beneficiary designation form that is completed when someone opens a retirement account or purchases a life insurance plan. Most people don’t even think about those designations again, until they embark on the estate planning process, when they are reviewed.

The beneficiary designations are carefully tailored to allow the asset to pass through to the heir, often via trusts that have been created to achieve a variety of benefits. The use of beneficiary designations also allows the asset to remain outside of the estate, avoiding probate after death.

Apart from the beneficiary designations on retirement accounts and life insurance policies, beneficiary designations are also available through checking and savings accounts, CDs, U.S. Savings Bonds or investment accounts. The problem occurs when these assets are not considered during the estate planning process, potentially defeating the tax planning and distribution plans created.

The most common way this happens, is when a well-meaning bank employee or financial advisor asks if the person would like to name a beneficiary and explains to the account holder how it will help their heirs avoid probate. However, if the estate planning lawyer, whose goal is to plan for the entire estate, is not informed of these beneficiary designations, there could be repercussions. Some of the unintended consequences include:

Loss of tax saving strategies. If the estate plan uses funding formulas to optimize tax savings by way of a credit shelter trust, marital trust or generation-skipping trust, the assets are not available to fund the trusts and the tax planning strategy may not work as intended.

Unintentional beneficiary exclusion. If all or a large portion of the assets pass directly to the beneficiaries, there may not be enough assets to satisfy bequests to other individuals or trust funds created by the estate plan.

Loss of creditor protection/asset management. Many estate plans are created with trusts intended to protect assets against creditor claims or to provide asset management for a beneficiary. If the assets pass directly to heirs, any protection created by the estate plan is lost.

Estate administration issues. If a large portion of the assets pass to beneficiaries directly, the administration of the estate—that means taxes, debts, and expenses—may be complicated by a lack of funds under the control of the executor and/or the fiduciary. If estate tax is due, the beneficiary of an account may be held liable for paying the proportionate share of any taxes.

Before adding a beneficiary designation to a non-retirement account, or changing a bank account to a POD (Payable on Death), speak with your estate planning attorney to ensure that the plan you put into place will work if you make these changes. When you review your estate plan, review beneficiary designations. The wrong step here could have a major impact for your heirs.

Reference: The National Law Review (Feb. 28, 2020) “Overuse of Beneficiary Designations: How They Can Derail a Client’s Estate Plan”

Why Do I Need to Have Up-to-Date Beneficiaries on My Accounts?

When a family member passes away, it can be a very unsettling time. There are many tasks that need to be accomplished in a short amount of time. One way that you can lessen that burden for your heirs by clearly telling them your preferences for your assets. One element of this is making certain that you have accurate beneficiaries to your retirement and investment accounts.

Nerd Wallet’s recent article entitled “5 Reasons to Add Beneficiaries to Your Investment Accounts Now” says taking the time to do this will help save your heirs and family time, money and energy when they need it most. Let’s take a look at some of the compelling reasons to do this.

  1. Your beneficiaries get to keep more money (and get it faster). When your beneficiaries are assigned to your investment and retirement accounts, the assets will pass directly to them. However, if they are not, those accounts may have to go through the probate process to settle an estate after someone dies. A typical probate case can drag on for a year or longer, and during that time, your beneficiaries are unable to access their inheritance. “Court” also means expenses, time, effort and added stress—all of which are things they’d rather avoid.
  2. Less stress for your heirs. When you make certain that you designate the beneficiaries for your accounts, it can relieve your family of a heavy burden, so they’re not trying to figure out your finances while they’re grieving.
  3. Your beneficiaries will supersede your will. If you have beneficiaries named, those choices will typically override what is written in your will. Therefore, you can see that keeping your beneficiaries up-to-date is extremely important.
  4. It’s easy and painless. If you have a retirement account, such as a 401(k) or an IRA, your account will typically have its own beneficiary form within the account itself. With this, you are able to choose your beneficiaries when you open your account or review them later. With a regular investment account, you’ll need to ask for a transfer on death (TOD) form to make beneficiary elections.
  5. You recently experienced a change in your circumstances. If you experience a big life change, like getting married or having a child, it’s critical to update or add beneficiary elections immediately. It’s best to be prepared for the unexpected.

Remember that in community property states, spouses may be entitled to half of the assets in an IRA — even if another beneficiary is listed — unless you have written consent. Ask a qualified estate planning attorney about state laws to be sure your money goes to whom you want.

Reference: Nerd Wallet (January 22, 2020) “5 Reasons to Add Beneficiaries to Your Investment Accounts Now”

How Can I Move On after a Loved One Dies?

Kiplinger’s recent article entitled “Moving Forward Financially After the Loss of a Loved One” says that there really are no rules about how you should feel or how long it will take you to regain your energy and ability to move forward. Grief is difficult to avoid, but there are many financial and legal tasks that will require your immediate attention. Here are some of the actions that can ease this process and help you to get back on track financially.

Here’s a breakdown of what you will need to address in the near future:

  • Gather important information, such as the deceased’s Social Security number, birth certificate, marriage certificate and military discharge papers.
  • Obtain at least 10 copies of the death certificates, because each claim will need to have an original copy of the death certificate attached.
  • Inform the Social Security office about the death and file a Social Security benefits claim form to qualify for the death benefit.
  • Find the title to any automobiles
  • Print out up-to-date statements for bank, brokerage and retirement accounts.
  • The executor should file the deceased’s will (if there is one) with the Probate Court.
  • The executor should obtain letters testamentary from the court.
  • File a death claim with the deceased’s life insurance company, if applicable.
  • Contact the Employer’s Benefits department about survivorship pension, health insurance, unpaid salary and life insurance benefits, if applicable.
  • Prepare a preliminary monthly budget and income summary.

You should seek the advice of an experienced estate planning or probate attorney. You should also retitle any joint accounts into your name and transfer any inherited IRA into your name and take out a required minimum distribution (RMD), if applicable. New beneficiaries should also be named and deeds for any real estate jointly held with rights of survivorship updated.

You need to file a federal estate tax return within nine months.

Don’t face these challenges alone. Contact an experienced estate planning lawyer for help.

Reference: Kiplinger (Jan. 8, 2020) “Moving Forward Financially After the Loss of a Loved One”

What Should I Know about Beneficiary Designations?

A designated beneficiary is named on a life insurance policy or some type of investment account as the individual(s) who will receive those assets, in the event of the account holder’s death. The beneficiary designation doesn’t replace a signed will but takes precedence over any instructions about these accounts in a will. If the decedent doesn’t have a will, the beneficiary may see a long delay in the probate court.

If you’ve done your estate planning, most likely you’ve spent a fair amount of time on the creation of your will. You’ve discussed the terms with an established estate planning attorney and reviewed the document before signing it.

FEDweek’s recent article entitled “Customizing Your Beneficiary Designations” points out, however, that with your IRA, you probably spent far less time planning for its ultimate disposition.

The bank, brokerage firm, or mutual fund company that acts as custodian undoubtedly has a standard beneficiary designation form. It is likely that you took only a moment or two to write in the name of your spouse or the names of your children.

A beneficiary designation on account, like an IRA, gives instructions on how your assets will be distributed upon your death.

If you have only a tiny sum in your IRA, a cursory treatment might make sense. Therefore, you could consider preparing the customized beneficiary designation form from the bank or company.

For more customization, you can have a form prepared by an estate planning attorney familiar with retirement plans.

You can address various possibilities with this form, such as the scenario where your beneficiary predeceases you, or she becomes incompetent. Another circumstance to address, is if you and your beneficiary die in the same accident.

These situations aren’t fun to think about but they’re the issues usually covered in a will. Therefore, they should be addressed, if a sizeable IRA is at stake.

After this form has been drafted to your liking, deliver at least two copies to your custodian. Request that one be signed and dated by an official at the firm and returned to you. The other copy can be kept by the custodian.

Reference: FEDweek (Dec. 26, 2019) “Customizing Your Beneficiary Designations”

Life Insurance Is a Good Estate Planning Tool but Needs to Be Done Carefully

With proper planning and the help of a seasoned estate planning or probate attorney, insurance money can pay expenses, like estate tax and avoid the need to liquidate other assets, says FEDweek’s recent article entitled “Errors to Avoid in Using Life Insurance for Estate Planning.”

As an example, let’s say that Reggie passes away and leaves a large estate to his daughter Veronica. There’s a big estate tax that’s due. However, the majority of Reggie’s assets are tied up in real estate and an IRA. In light of this, Veronica might not want to proceed directly into a forced sale of the real estate. However, if she taps the inherited IRA to raise cash, she’ll be required to pay income tax on the withdrawal and forfeit a very worthwhile opportunity for extended tax deferral.

If Reggie plans ahead, he could purchase insurance on his own life. The proceeds could be used to pay the estate tax bill. As a result, Veronica can retain the real estate, while taking only minimum required distributions (RMDs) from the inherited IRA.

If the insurance policy is owned by Veronica or by a trust, the proceeds probably won’t be included in Reggie’s estate and won’t increase her estate taxes.

Along these same lines, here are some common life insurance errors to avoid:

Designating your estate as beneficiary. When you make this move, it puts the insurance policy proceeds into your estate, exposing it to estate tax and your creditors. Your executor will also have to deal with more paperwork, if your estate is the beneficiary. Instead, name the appropriate people or charities.

Designating just a single beneficiary. You should name at least two “backup” beneficiaries. This will decrease any confusion, if the primary beneficiary predeceases you.

Throwing the copy of your life insurance policy in the “file and forget” drawer. You should review your policies at least once every few years. If the beneficiary is an ex-spouse or someone who’s passed away, make the appropriate changes and get a confirmation from the insurance company in writing.

Failing to carry adequate insurance. If you have a youngster, it undoubtedly requires hundreds of thousands of dollars to pay all her expenses, such as college bills, in the event of your untimely death.

Talk to a qualified and experienced estate planning attorney about the particulars of your situation.

Reference: FEDweek (Dec. 12, 2019) “Errors to Avoid in Using Life Insurance for Estate Planning”

How Can Life Insurance Help My Estate Plan?

In the 1990s, it wasn’t unusual for people to buy second-to-die life insurance policies to help pay federal estate taxes. However, in 2019, with estate tax exclusions up to $11,400,000 (and rising with the cost-of-living adjustments), fewer people would owe much for estate taxes.

However, IRAs, 401(k)s, and other accounts are still 100% taxable to the individuals, spouses and their children. The stretch IRA options still exist, but they may go away, as Congress may limit stretch IRAs to a maximum of 10 years.

Forbes’ recent article, “3 Ways Life Insurance Can Help Your Estate Plan,” explains that as the IRA is giving income from the RMDs, it may also be added, after tax, to the life insurance policy. If this occurs, it’s even possible that the death benefits could grow in the future, giving a cost-of-living benefit to children. This is one way how life insurance can be used creatively to help your estate plan.

For married couples, one strategy is to consider how life insurance on one individual could be used to pay “conversion tax” at death, using tax-free benefits. When the retiree dies, the spouse beneficiary can then convert all the IRA (taxable money) to a Roth IRA, which is tax-exempt with new, lower income tax rates (37% in 2018-2025 versus 39.6% in 2017 or earlier).

This tax-free death benefit money can be used to pay the taxes on the conversion, letting the surviving beneficiary have a lifetime of tax-exempt income without RMD issues from the Roth IRA. The Social Security income could also be tax-exempt, because Roth withdrawals don’t count as “income” in the calculation to see how much of your Social Security is taxed. However, you’d have to be within the threshold for any other combined income.

Life insurance for both individuals (if married) may also be a good idea. If the spouse of the IRA owner dies, the money from the life insurance can be used once again. If this is done in the tax year of the death for married individuals, the tax conversion could be done under “married filing status” before the next year, when the individual must use single tax filing status.

Another benefit of the IRA-to-Roth conversion is the passing of Roth IRAs to heirs, which could create a lasting legacy, if planned well. New life insurance policies that add long-term care features with chronic care and critical care benefits can also provide an extra degree of benefits, if one of the insureds has health issues prior to death.

Be sure to watch the tax rates and possible changes. With today’s lower tax rates, this could be very beneficial. Remember that there are usually individual state taxes as well. However, considering all the tax-optimized benefits to spouses and beneficiaries, the long-term tax benefits outweigh the lifetime tax liabilities, especially when you also consider SSI tax benefits for the surviving spouse and no RMD issues.

Life insurance in retirement can help protect, build and transfer wealth in one of the easiest ways possible. If you’re not certain about where to start with your life insurance needs, speak with an experienced estate planning attorney.

Reference: Forbes (November 15, 2019) “3 Ways Life Insurance Can Help Your Estate Plan”

Disinheriting Loved Ones is A Common Mistake

It happens way more often than you’d ever expect. The account owner dies, the assets go directly to the beneficiaries on the account, and the heirs learn for the first time that whatever is in the will doesn’t override the beneficiary designation. They can argue and even go to court, but it won’t do them much good, says the recent article “Don’t accidentally leave your estate to the wrong person” from The News-Enterprise.

One of many examples, is the widower who remarries after his first wife passes away. He neglects to change his IRA beneficiary form, so when he dies, his second wife does not receive any funds. The case of what happens to the funds has to go to court, because the assets obviously cannot go to his deceased first wife.

Many different kinds of accounts now have beneficiary designations. They include:

  • S. Savings Bonds
  • Bank Accounts
  • Certificates of Deposits
  • Investment Accounts
  • Life Insurance
  • Annuities
  • Retirement Accounts

Some of these accounts can be titled “Payable on Death” or “Transferable on Death,” so that they can more easily be distributed to heirs without going through probate.

If you’ve changed jobs, remember that beneficiary designations do not transfer over, when you roll your 401(k) over to a new plan or IRA.

Here’s another thing most people don’t know about beneficiary designations: they don’t have to be individuals. Beneficiaries can be trusts, charities, organizations, your estate, or, no one at all (although that’s not recommended). Be careful, though, if you are thinking about being creative, like saying “All of my living grandchildren.” What if someone who your family has never met, comes forward and claims to be a grandchild? It’s best to discuss this with an estate planning lawyer.

There are situations where you don’t want to name someone as a beneficiary. You don’t want to leave assets outright to minors, since they cannot inherit property. A court-appointed guardian would have to be named to care for the assets, until the child reaches age 18. Then the 18 year old inherits everything at once and goes on a wild spending spree, and the money is gone. A better approach is to set up a trust, so the trust is the beneficiary of the assets and the trust pays money to heirs over an extended period of time.

Caution must be taken, when considering Special Needs Individuals. If they are receiving government benefits, an inheritance could cause them to lose all benefits. Instead, speak with your estate planning attorney about the use of a Special Needs Trust or Supplemental Needs Trust.

Updating the beneficiary form is simple. Contact the financial company that holds the accounts, ask for a copy of your current beneficiary form, and a blank copy so that you can make changes, if needed. Keep a copy of all current beneficiary forms. You should also speak with your estate planning attorney to make sure that your estate plan and your beneficiary designations work together.

Reference: The News-Enterprise (November 30, 2019) “Don’t accidentally leave your estate to the wrong person”

What are the Biggest Estate Planning Errors to Avoid?

Nobody likes to plan for events like aging, incapacity, or death. However, failing to do so can cause families burdens and grief, thousands of dollars and hundreds of hours.

Fox Business’ recent article, “Here are the top estate planning mistakes to avoid,” says that planning for life’s unexpected events is critical. However, it can often be a hard process to navigate. Let’s look at the top estate planning mistakes to avoid, according to industry experts:

  1. Failing to sign a will (or one that can be located). The biggest mistake is simply not having a will. Estate planning is critically important to protect you, your family and your hard-earned assets—during your lifetime, in the event of your incapacity, and upon your death. We all need estate planning, no matter the amount of assets you have. In addition to having a will, it needs to be findable. The Wall Street Journal says that the biggest estate planning error is simply losing a will. Make sure your family has access to your estate planning documents.
  2. Failing to name and update beneficiaries. An asset with a beneficiary designation supersedes any terms in a will. Review your 401(k), IRA, life insurance, and any other accounts with beneficiaries after any significant life event. If you don’t have the proper beneficiary designations, income tax on retirement accounts may have to be paid sooner. This may lead to increased income tax liability, and the designation of a beneficiary on a life insurance policy can affect whether the proceeds are subject to creditors’ claims.

There’s another mistake that impacts people with minor children, which is naming a guardian for minor children and then naming that person as beneficiary of their life insurance, instead of leaving it to a trust for the child. A minor child can’t receive that money. It also exposes the money to the beneficiary’s creditors and spouse.

  1. Failing to consider powers of attorney for adult children. When your children reach age 18, they’re adults in the eyes of the law. If something unfortunate happens to them, you may be left without any say in their treatment. In the event that an 18-year-old becomes ill or has an accident, a hospital won’t consult with their parents if a power of attorney for health care isn’t in place. Unless a power of attorney for property is signed, a parent may not be able to take care of bills, make investment decisions and pay taxes without the child’s signature. This could create an issue when your child is in college—especially if he or she is attending school abroad. It is very important that when your child turns 18 that you have powers of attorney put into place.

Reference: Fox Business (October 15, 2019) “Here are the top estate planning mistakes to avoid”

Don’t Ask Heirs to Guess What You Wanted—Have an Estate Plan
Table with wooden houses, calculator, magnifying glass with the word Estate planning. Property insurance. Mortgage. Investing. Living trust. Write a will. Woman sits at the table and writes plans

Don’t Ask Heirs to Guess What You Wanted—Have an Estate Plan

With an estate plan, you can distribute your assets according to your own wishes. Without one, your heirs may spend years and a good deal of money trying to settle your estate, reports U.S. News & World Report in the article “5 Reasons to Make an Estate Plan.”

If there is no estate plan in place, including a will, living trust, advance directives and other documents, people you love will be put in a position of guessing what you wanted for any number of things, from what your final wishes would be in a medical crisis, to what kind of a funeral would like to have. That guessing can cause strife between family members and worry, for a lifetime, that they didn’t do what you wanted.

Think of your estate plan as a love letter, showing that you care enough about those you love to do right by them.

What is estate planning? Estate planning is the process of legally documenting what you want to happen when you die. It also includes planning for your wishes in case of incapacity, that is, when you are not legally competent to make decisions for yourself because of illness or an injury. This is done through the use of wills, trusts, advance directives and beneficiary designations on accounts and life insurance policies.

Let’s face it, people don’t like to think about their passing, so they postpone making an appointment with an estate planning attorney. There’s also the fear of the unknown: will they have to share a lot of information with the attorney? Will it become complicated? Will they have to make decisions that they are not sure they can make?

Estate planning attorneys are experienced with the issues that come with planning for incapacity and death, and they are able to guide clients through the process.

The power of putting wishes down on paper can provide a great deal of relief to the people who are making the plan and to their family members. Here are five reasons why everyone should have an estate plan:

Avoid Probate. Without a will, the probate court decides how to distribute your estate. In some states, it can take at least seven months to allow creditors to put through claims. The estate is also public, with your information available to the public. Probate can also be expensive.

Minimize Taxes. There are a number of strategies that can be used to minimize taxes being imposed on your heirs. While the federal estate tax exemption is $11.4 million per individual, states have estate taxes and some states impose an inheritance taxes. An estate planning attorney can help you minimize the tax impact of your estate.

Care for Minor Children. Families with minor children need a plan for care, if both parents should pass away. Without a will that names a guardian for young children, the court will appoint a guardian to raise a child. With a will, you can prevent the scenario of relatives squabbling over who should get custody of minor children.

Distributing Assets. If you have a will, you can say who you want to get what assets. If you don’t, the laws of your state will determine who gets what. You can also use trusts to control how and when assets are distributed, in case there are heirs who are unable to manage money.

Plan for Pets. In many states, you can create a Pet Trust and name a trustee to manage the money, while naming someone in your will who will be in charge of caring for your pet. Seniors are often reluctant to get a pet, because they are concerned that they will die before the pet. However, with an estate plan that includes a pet trust, you can protect your pet.

Reference: U.S. News & World Report (October 18, 2019) “5 Reasons to Make an Estate Plan”

Do Name Changes Need to Be Reflected in Estate Planning Documents?

When names change, executing documents with the person’s prior name can become problematic. For example, what about a daughter who was named as a health care representative by her parents several years ago, who marries and changes her name? Then, to make matters more complicated, add the fact that the couple’s daughter-in-law has the same first name, but a different middle name. That’s the situation presented in the article “Estate Planning: Name changes and the estate plan” from nwi.com.

When a person’s name changes, many documents need to be changed, including items like driver’s licenses, passports, insurance policies, etc. The change of a name isn’t just about the person who created the estate plan but also to their executors, heirs, beneficiaries and those who have been named with certain legal powers through power of attorney (POA) and health care power of attorney.

It’s not an unusual situation, but it does have to be addressed. It’s pretty common to include additional identifiers in the documents. For example, let’s say the will says I leave my house to my daughter Samantha Roberts. If Samantha gets married and changes her last name, it can be reasonably assumed that she can be identified. In some cases, the document may be able to stay the same.

In other instances, the difference will be incorporated through the use of the acronym AKA—Also Known As. That is used when a person’s name is different for some reason. If the deed to a home says Mary Green, but the person’s real name is Mary G. Jones, the term used will be Mary Green A/K/A Mary G. Jones.

Sometimes when a person’s name has changed completely, another acronym is use: N/K/A, or Now Known As. For example, if Jessica A. Gordon marries or divorces and changes her name to Jessica A. Jones, the phrase Jessica A. Gordon N/K/A Jessica A. Jones would be used.

However, in the situation noted above, most attorneys to want to have the documents changed to reflect the name change. First, there are two people in the family with similar names. It is possible that someone could claim that the person wished to name the other person. It may not be a strong case, but challenges have been made over smaller matters.

Second is that the document being discussed is a healthcare designation. Usually when a health care power of attorney form is being used, it’s in an emergency. Would a doctor make a daughter prove that she is who she says she is? It seems unlikely, but the risk of something like that happening is too great. It is much easier to simply have the document updated.

In most matters, when there is a name change, it’s not a big deal. However, in estate planning documents, where there are risks about being able to make decisions in a timely manner or to mitigate the possibility of an estate challenge, a name change to update documents is an ounce of prevention worth a pound of trouble in the future.

Reference: nwi.com (October 20, 2019) “Estate Planning: Name changes and the estate plan”

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