Common Mistakes Made on Beneficiary Designations

Assets like life insurance, retirement accounts and annuities are governed by beneficiary designations.
Assets like life insurance, retirement accounts and annuities are governed by beneficiary designations which override your will.

Many accounts and other assets are governed by beneficiary designations. Examples include life insurance, 401(k)s, IRAs, and annuities. These assets rely on contractual provisions with the financial institution to designate who receives the benefits upon the death of the owner.

Kiplinger’s recent article entitled “Beneficiary Designations – The Overlooked Minefield of Estate Planning” describes several mistakes that people make with beneficiary designations and some ideas on how to avoid problems for you and your family members.

Believing that Your Will is More Powerful Than It Really Is. Many people mistakenly think that their will takes precedence over a beneficiary designation form. This is not true. Your will controls the disposition of assets in your “probate” estate. However, the accounts with contractual beneficiary designations aren’t governed by your will because they pass outside of probate. That is why you need to review your beneficiary designations whenever you review your estate plan.

Allowing Accounts to Fall Through the Cracks. Inattention is another thing that can lead to unintended outcomes. A prior employer 401(k) account can be what is known as “orphaned,” which means that the account stays with the former employer and isn’t updated to reflect the account holder’s current situation. It’s not unusual to forget about an account you started at your first job and fail to update the primary beneficiary, which could be a former spouse.

Not Having a Contingency Plan. Another thing people don’t think about is that a beneficiary may predecease them. It is important to name a contingent or secondary beneficiary in the event the first beneficiary is not survivig.

Not Paying Attention to a Per Stirpes Election. If a person names several beneficiaries (such as children) as primary beneficiaries to share equally in the account or life insurance policy at the owner’s death, what happens if one of the beneficiaries is not surviving? Some beneficiary designation forms state that the deceased beneficiary’s share automatically goes to the other surviving beneficiaries. Other beneficiary designation forms give the owner the option to state that the deceased beneficiary’s share should pass to the deceased beneficiary’s children. This is known as a per stirpes election. Many times people are unaware as to which option they have chosen on the beneficiary designation form.

Naming a Minor or Incapacitated Person as a Beneficiary. If a minor or incapacitated person is named as beneficiary, unless the beneficiary designation form allows for the appointment of a custodian or trustee to accept the benefits on behalf of the minor or incapacitated person, a court-appointed guardian may be necessary for the minor or incapaciated person to receive the benefits. Also keep in mind that if an incapaciated person you’ve named as beneficiary is receiving government benefits, distributions from a retirement account, annuity, or life insurance policy, may jeopardize his or her eligiblity to receive the government benefits.

It’s smart to retain copies of all communications when updating beneficiary designations in hard copy or electronically. These copies of correspondence, website submissions and received confirmations from account administrators should be kept with your estate planning documents in a safe location.

Remember that you should review your estate plan and beneficiary designations every few years to make sure that they are coordinated and that they say what your really want.

You may also be interested in https://galligan-law.com/trust-owned-life-insurance-in-your-estate-plan/.

Reference: Kiplinger (March 4, 2020) “Beneficiary Designations – The Overlooked Minefield of Estate Planning”

 

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Trust-owned Life Insurance in your Estate Plan

Trust-owned life insurance is a useful tool to accomplish estate tax and long term care planning, but requires a sophisticated trustee to handle it.

Trusts are frequently used in the estate planning process. They help with in the distribution of assets, incapacity planning and probate avoidance, making certain that everything is distributed to the right people and entities, provide creditor protection and more.  Many people don’t know that you can even place a life insurance policy within a trust.  Some trusts, typically those designed to reduce estate taxes or perform long term care planning, use trust-owned life insurance (TOLI) to accomplish those goals.

Investopedia’s recent article entitled “Can You Trust Your Trustee?” explains that life insurance in a trust is called trust-owned life insurance (TOLI). A TOLI is like bank-owned and company-owned life insurance. Trustees often do a good job of completing basic tasks, but conflicts and problems can pop up when trustees don’t understand where their loyalties should be and how to deal with complex financial issues.  A trustee has a fiduciary responsibility to the beneficiaries of a trust. The trustee is required to manage the trust assets pursuant to the instructions of the trust for the beneficiaries.

The trustee must, therefore, actively manage the insurance policy, or policies, that are owned by the trust. This includes ensuring the trust’s purposes are being served, such as providing notice to beneficiaries of withdraw rights.  It also includes determining if the policy is performing up to the projections reflected in the original life insurance illustration and identifying alternatives more in line with the goals of the trust.  New life insurance products have made some policies sold in the past obsolete and an old under-performing policy can often be replaced. However, some trustees don’t possess the skills necessary to oversee trust-owned life insurance. A trustee should understand and be aware of:

  • The policy’s performance relative to expectations
  • The last time the life insurance policy was reviewed
  • If there are other policies that may do a better job of meeting wishes and stipulations expressed in the trust document
  • Whether the credit rating of the insurance company that issued the policy has decreased and
  • If the allocation of the sub-accounts is still aligned with the investment policy statement.

Now, not all insurance needs to be TOLI.  It is important to discuss this with your attorney to determined whether a trust which owns life a life insurance policy is beneficial to you, and whether to have your insurance owned by your trust.  See here for trust basics to address this topic.  https://galligan-law.com/how-do-trusts-work-in-your-estate-plan/

Trust-owned life insurance can have an important role in the estate plans of many people, but not all trustees have the bandwidth when it comes to insurance and estate planning to fulfill their fiduciary responsibilities. Ask an experienced estate planning attorney for assistance.

Reference: Investopedia (June 25, 2019) “Can You Trust Your Trustee?”

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When an Elderly Parent Refuses to Make a Will

An elderly parent may need your encouragement to get an estate plan.
An elderly parent may need your encouragement to get an estate plan.

This is a tough scenario. It happens more often than you’d think. Your elderly parent or other family member owns a home, investment accounts and a retirement account, but doesn’t want to have an estate plan. They know they need to do something, but keep putting it off—until they die, and the family is left with an expensive and stressful mess. A recent article titled “How to Get a Loved One to Visit an Estate Planning Attorney Before It’s Too Late” from Kiplinger, suggests ways to talk to a family member about the need for an estate plan.

Most people put off seeing an estate planning attorney, because they are afraid of death. They may also be overwhelmed by the thought of how much work is involved. They are also worried about what it all might cost. However, if there is no estate plan, the costs will be far higher for the family.

How do you get your elderly parent or other family member to understand that they need to move forward?

Talk with the financial professionals your elderly parent or family member already uses and trusts, like a CPA or financial advisor. Ask them for a referral to an estate planning attorney they think would be a good fit with your family member who doesn’t have an estate plan. It may be easier to hear this message from a CPA, than from an adult child.

Work with that professional to help your older family member get comfortable with the idea of talking about their wishes and values with the estate planning attorney. Offer to attend the meeting, or to facilitate the video conference, to make your loved one feel more comfortable.

An experienced estate planning attorney will have worked with reluctant people before. They’ll know how to put the older person at ease and explore their concerns. When the conversation is pleasant and productive, the person may understand that the process will not be as challenging as they had thought and that there will be a lot of help along the way.

If there is no trusted team of professionals, then offer to be a part of any conversations with the estate planning attorney to make the introductory discussion easier. Share your own experience in estate planning with your older family member and mention the reasons that prompted you to create an estate plan. Those reasons could include the peace of mind knowing that your family will not be faced with the time consuming and expensive task of trying to straighten out your affairs after you are gone.

Sometimes the best way to initiate a conversation with your elderly parents about estate planning is to mention that you are planning to do your own estate plan and ask their advice on what issues your should be considering. That may make it easier to ask your family member what they have done regarding their own estate plan.

Trying to force a person to engage in estate planning with a heavy hand, almost always ends up in a stubborn refusal. A gentle approach will always be more successful. Explaining how an estate plan includes not only distributing assets at death, but planning for medical decisions while the person is living, may motivate an otherwise reluctant family member to take that first step.

Describing what the family members will need to go through if there is no will, may or may not have an impact. Some people don’t care, and may simply shrug and say, “It’ll be their problem, not mine.” Consider what or who matters to the person. What if they could leave a gift to a favorite charity or create a fund for their grandchildren to go to college? That might be more motivating.

Another thing to consider: what if your elderly parent or family member has an estate plan and it is out of date? That may be just as bad as not having an estate plan at all, especially if tax laws have changed since the estate plan was made. Also, what if, instead of naming their children as agents to make medical decisions for them, an old health care directive names an undesirable person, such as a former brother-in-law to make medical decisions?

Most people really want to have an estate plan in place, but just never get around to doing it. You could provide a great service to your elderly parent or other family member by giving them the encouragement and assistance to move forward so they can cross this task off their list of things they need to take care of.

You may also be interested in https://galligan-law.com/caring-for-an-elderly-parent-without-ruining-your-relationship/.

Reference: Kiplinger (May 11, 2020) “How to Get a Loved One to Visit an Estate Planning Attorney Before It’s Too Late”

 

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