Keeping Beneficiary Designations Up to Date

If you don’t know who your beneficiaries are, then it’s time for a beneficiary designation check. Even if you think you remember, every now and then, they should be checked, according to an article “Are your beneficiary designations up to date?” from Community Voice.

It has become very common for estate plans to be largely controlled through beneficiary designations.  Many people accumulate wealth in 401(K)s or IRAs which pass to named beneficiaries, or clients add named beneficiaries at the suggestion of a banker to avoid probate.  With so many beneficiary designations controlling so many accounts and so much wealth, it’s critical to make sure they reflect your wishes.

I even had a law school professor who suggested one of the worst estate planning mistakes was failing to address beneficiary designations!

Your choices may change with time. When did you open your very first IRA? Do you even remember when you purchased your life insurance policies? If it was back in the 1990s, chances are good the people in your life have changed, as well as your priorities. Your kids are likely grown, or maybe you have more of them!  Maybe one of your beneficiaries has developed some bad habits, and you want to control how the money will impact them.  There are lots of reasons beneficiary designations don’t fit anymore.

When we first filled out the beneficiary designations, we were all confident they’d be the same forever, but time and life have a way of changing things. In five, ten or twenty years, big changes may have happened in your life. Your beneficiary designations and your estate plan need to reflect where you are now, not where you were then.

The best way to address beneficiary designations is reviewing them with your estate plan annually.  If you’re still working, your employer may have changed custodians for your retirement plan and your insurance policy. When a new custodian takes over, sometimes beneficiary designations can get lost in the change, that has happened many, many times.  I’ve also seen companies say they won’t honor beneficiary designations because of internal policy changes.

Life events can also affect your beneficiary designations.  Did you get divorced?  I’d imagine you don’t want your ex as the beneficiary of your accounts.  Do you have minor beneficiaries?  You want to name a custodian of that money in the account plan as part of your designations, otherwise your loved ones are headed to guardianship court.

If you don’t have a beneficiary designation on these accounts, or any account where you have the option to name a beneficiary, you may have a bigger problem. The tax-focused part of your estate plan could be undone if you thought your 401(k) would go to your spouse but your spouse predeceased you.

What’s the best way to handle this?  Make sure your designations coordinate with your estate plan.  What most people don’t realize is that whatever choice you make on the beneficiary designation overrides anything in their estate plan because it passes right to that beneficiary.  That sounds good, but notice most of the problems I’ve recounted are because your circumstances change, or contingencies aren’t adequately planned for.  You also have no control over the contingencies if a named beneficiary should pass away and you failed to address it in the designations.

Your estate plan can cover all of this, which is why directing assets to your estate plan via beneficiary designations might be a great idea.  Everything will go to the persons you intended, but the estate plan will help bypass all of these problems.

Moral to the story, don’t rely on beneficiary designations and make sure you keep them up to date and coordinating with your estate plan to ensure your assets pass to your beneficiaries as you intended.

Reference: Community Voice (September 30, 2022) “Are your beneficiary designations up to date?”

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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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Elder Abuse Continues as a Billion-dollar Problem

Elder abuse continues to be a problem for seniors, but individuals can take steps to protect themselves in their estate plans and finances.

Aging baby boomers are a giant target for scammers. A report issued last year from a federal agency, the Consumer Financial Protection Bureau highlighted the growth in banks and brokerage firms that reported suspicious activity in elderly clients’ accounts. The monthly filing of suspicious activity reports tied to elder financial exploitation increased four times from 2013 through 2017, according to a recent article from the Rome-News Tribune titled “Financial abuse steals billions from seniors each year.”

When the victim knew the other person, a family member or an acquaintance, the average loss was around $50,000. When the victim did not have a personal relationship with their scammer, the average loss was around $17,000.  See this recent blog for more background.  https://galligan-law.com/elder-financial-abuse-is-increasing/

What can you do to protect yourself, now and in the future, from becoming a victim? There are many ways to build a defense that will make it less likely that you or a loved one will become a victim of these scams.

First, don’t put off taking steps to protect yourself, while you are relatively young. Putting safeguards into place now can make you less vulnerable in the future. If you are suffer bad health and lack of capacity later, it may be too late.

Create a durable power of attorney as part of your estate plan. The power of attorney names a trusted person you name as your legal representative or agent, who can manage your financial affairs if need be.  You should also consider using a trust which owns assets during your lifetime.  While it is true that family members are often the ones who commit financial elder abuse, you’ll need to put your trust in someone. Usually this is an adult child or a relative. You may also consider a bank as a trustee.  They will charge for their services, but their professionalism makes a bank an excellent choice.

It may also help to bring your agent, trustee and other loved ones into the discussion about assisting with your finances well before incapacity and be open with them about what you want your fiduciaries to do.  Of course, many people are hesitant to discuss finances openly, but as Justice Brandeis remarked over a hundred years ago, “Sunshine is said to be the best of disinfectants.”  Having multiple people aware of what is happening and what your fiduciaries are doing may prevent one bad actor from attempting or getting away with elder abuse.

Consider the guaranteed income approach to retirement planning. Figuring out how to generate a steady stream of income as you face the cognitive declines that occur in later years might be a challenge. Planning for this in advance will be better.  Social Security is one of the most valuable sources of guaranteed income. If you will receive a pension, try not to do a lump sum payout with the intent to invest the money on your own. That lump sum makes you a rich target for scammers.

Consider rolling over 401(k) accounts into Roth accounts, or simply into one account. If you have one or more workplace retirement plans, consolidating them will make it easier for you or your representative to manage investments and required minimum distributions.

Make sure that you have an estate plan in place, or that your estate plan is current. Over time, families grow and change, financial situations change and the intentions you had ten, twenty or even thirty years ago, may not be the same as they are today. An experienced estate planning attorney can ensure that your wishes today are followed, through the use of a will, trust and other estate planning strategies.

Resource: Rome News-Tribune (April 27, 2020) “Financial abuse steals billions from seniors each year.”

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