Many clients use beneficiary
designations, and for good reason. Some significant assets, including life
insurance policies, IRAs, retirement plans and even bank accounts, allow a
beneficiary to be named. It’s free, it’s easy, and, when the owner dies, these
assets are designed to be paid directly to the individual(s) named as
beneficiary, outside of probate.
But that is not always what happens. For example:
* If your beneficiary is incapacitated when
you die, the court will probably have to take control of the funds. That’s
because most life insurance companies and other financial institutions will not
knowingly pay to an incompetent person; they may insist on court supervision.
* If you name a minor as a beneficiary, you
are probably setting up a court guardianship for the child. Life insurance
companies and other financial institutions will not knowingly pay these funds
directly to a minor, nor will they pay to another person for the child, not even to a parent. They do not want the potential
liability and will usually require proof of a court-supervised guardianship.
* If you name “my estate” as beneficiary, the
court will have to determine who that is. The funds will have to go through
probate so they can be distributed along with your other assets.
* If your beneficiary dies before you (or you
both die at the same time) and you have not named a secondary beneficiary, the
proceeds will have to go through probate so they can be distributed with the
rest of your assets.
Even if the funds are
paid to the named beneficiary, things may not work out as the owner intended.
For example:
* Some people just cannot handle large sums of
money. They may spend irresponsibly, be influenced by a spouse or friend, make
bad investment choices, or lose the money to an ex-spouse or creditor. If the
beneficiary receives a tax-deferred account, he/she may decide to “cash out”
and negate your careful planning for continued long-term tax-deferred growth.
* If you name someone as a beneficiary with
the “understanding” that the funds will be used to care for another or will be “held”
until a later time, you have no guarantee that will happen. The money may just
be too tempting.
* If the person you name as beneficiary is
receiving government benefits (for example, a child or parent who requires
special care), you could be jeopardizing their ability to continue to receive
these benefits.
* If your estate is larger, your choice of
beneficiary could limit your tax planning options, causing serious tax
consequences for your family.
Beneficiary designations can be quite useful, but they need
to be considered as part of an overall estate plan. Naming a trust as
beneficiary will generally prevent the problems described above, and by bringing
all of the client’s assets together under one plan, you can be sure that each
beneficiary will receive the amount the client wants them to have—something
that can be difficult to accomplish with multiple designations.
When
meeting with a potential client, or reviewing a client’s existing plan, it is
important for the California estate planning professional to see all beneficiary
designations. Correcting any designations now, and making sure the client
understands them, will help to prevent significant future problems.
