In our earlier posts, we discussed some issues commonly found with respect to beneficiaries in life insurance, trusts, and IRAs. Now, we want to mention why these must be coordinated with your estate plans. You did get your estate plans set up, right?
A. Ok, then… why should I Coordinate All Beneficiary Designations with Overall Estate Plan?
This is one of the biggest mistakes that people make when they do their own Will or when they move from one state to another. People simply forget that the beneficiary designation in the IRA, life insurance, and bank accounts automatically controls who gets the asset. The Will never comes into play because the assets go to the beneficiary designation.
Suppose you take the time to work with your attorney to lay out (in the Will or Trust) all the ways you want your assets to move to the kids and grandkids, and make arrangements for your church. That is all great! But, if your life insurance gives your major asset to your oldest son, and you never changed it when you had the next two kids … do you think your Will will have any effect? It won’t … in this example your life insurance will pay the oldest, and the others will get nothing.
Suppose you had money in your bank account for grandson Robert, but you neglected to change the beneficiary on the bank account from daughter Susie to grandson Robert. You’re right … Susie gets what you wanted Robert to have.
Finally, suppose you planned for a Special Needs Trust in your will (see part 2 of this series). If you don’t fund it properly with your life insurance policy or other assets, your planning is for naught.
Is that what you wanted? Improper beneficiary designations may result in unintended consequences, such as adverse tax consequences, failure to distribute the estate as intended, or worse, inadvertently leaving out a family member from an inheritance.
In part 1, we suggested that you set up beneficiaries. Here, we suggest that you be certain that the beneficiaries you identify match up to the plans you have for your assets. Don’t leave your wealth differently for different parts of the plan. Coordinate!
B. Change your plans when you change your life… Remove your Ex-Spouse as Beneficiary!
Often we find former spouses still listed as beneficiaries of life insurance, individual retirement accounts, qualified plans and other financial accounts, even though that clearly wasn’t the intent. We even find their names on estate plans! A divorce may not automatically remove your ex-spouse as a beneficiary, depending on the product type (especially qualified retirement plans). Although ex-spousal claims usually are severed in an estate, a gift in a Will listing your ex-spouse “Joseph” by name might still be presumed to be for that person.
Make sure you follow the guidelines and change beneficiary designations immediately upon a divorce. You probably should consider that on separating too. There is a story about Peter Sellers (actor, Pink Panther). He was in the midst of divorcing a spouse when he died unexpectedly. The soon-to-be-Ex received the entire estate (millions of dollars) and his children were left with next to nothing. Don’t let that be you!
Similarly, remove those people who have already predeceased you. This could even apply to family members who are estranged. As in the other parts we discussed, this situation may result in assets going to unintended beneficiaries, delays in access to funds, and unnecessary legal and administrative expenses.
Bottom line – Review beneficiary designations regularly and certainly after any significant life event.
Summary
Beneficiary designations are an important part of our estate planning practice. We review these with our annual maintenance clients every year. If you don’t do it already, you should engage a competent attorney to assist you with your estate plans.
It isn’t just the documents! Planning, discussions about your family’s needs, and help executing the decisions you make – that is the real value you will receive from your attorney!
Go back to:
Estate Planning coordination – part 3