It’s not uncommon for the intent of an individual’s will and trust to be overridden by beneficiary designations that weren’t chosen carefully.
Some people think that naming a beneficiary should be a simple job, and they try to do it themselves. Others don’t want to bother their attorney with what seems like a straightforward issue. A well-intentioned financial advisor could also complete the change of beneficiary form incorrectly.
Beneficiary designations are often used for life insurance and retirement benefits, but more frequently, they’re also being used for brokerage and bank accounts. People trying to avoid probate may name a “payable on death” beneficiary of an account. However, they don’t know that doing this may undermine their existing estate plan. It’s best to consult with your attorney to make certain that your named beneficiaries are consistent with your estate planning documents.
Wealth Advisor’s “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan” lists seven issues you need to think about, when making your beneficiary designations.
Cash. If your will leaves cash to various people or charities, you need to make certain that sufficient money comes into your estate, so your executor can pay these gifts.
Estate tax liability. If assets do pass outside your estate to a named beneficiary, make certain there will be sufficient money in your estate and trust to pay your estate tax lability. If all your assets pass by beneficiary designation, your executor may not have enough money to pay the estate taxes that may be due at your death.
Protect your tax savings. If you have created trusts for estate tax purposes, make sure that sufficient assets flow into your trusts to maximize the estate tax savings. Designating individuals as beneficiaries instead of your trusts may defeat the purpose of your estate tax planning. If there aren’t enough assets in your trust, the estate tax provisions may not work. As a result, your heirs may eventually end up paying more in taxes.
Accurate records. Be sure the information you have on the change of beneficiary form is accurate and up-to-date. This is particularly important if the beneficiary is a trust—the trust name, trustee information and tax identification number all need to be right.
Spouses as beneficiaries. Many people name their spouse as the primary beneficiary of their life insurance policy, followed by their trust as the secondary beneficiary. However, this may defeat your estate planning, especially if you have children from a first marriage, or if you don’t want your spouse to control the assets. If your trust provides for your surviving spouse on your death, he or she will be taken care of from the trust.
No last minute changes. Some people change their beneficiary designations at the last minute, because they’re nervous about assets flowing into a trust. This could lead to increased estate tax payments and litigation from heirs who were left out.
Qualified accounts. Don’t name a trust as the beneficiary of qualified accounts, like an IRA, without consulting with your attorney. Trusts that receive such qualified money need to contain special provisions for income tax purposes.
Here’s one not in the article, but I find myself advising clients about it frequently:
Family harmony. Some people with multiple children name just one child as the beneficiary on bank or investment accounts, relying on verbal assurances or “family agreements” that the child will share the inheritance with his or her siblings. It’s fast and easy. But there’s no legal obligation for that child to do so – that money becomes 100% his or her when the parent dies. And, even worse, it becomes available to every creditor that child may have, or it could be lost in a divorce if mixed with joint assets, or if that child dies shortly after inheriting the asset, it could end up going to his or her spouse instead of the siblings. The truth is, most children who inherit an asset won’t share the way the parent thinks they will. If you want all of your children to inherit something, name each one separately.
Be sure that your beneficiary designations work with your estate planning, rather than against it.
Reference: Wealth Advisor (October 8, 2019) “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan”
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