A beneficiary is easy to name on a life insurance policy, deferred compensation account, or estate plan. However, often, those beneficiaries are outdated, or through no fault of your own, they carry with them significant risk.
Outdated Beneficiary Designations
Having beneficiary names listed on policies and accounts who no longer are current to your wishes are more common than you can imagine. Moreover, the chances are you have beneficiaries listed right now that either do not include someone or include a person you no longer wish to receive the benefit.
Here are some examples:
- Previous marriages. If you are currently divorced or remarried and still have your former spouse listed as a beneficiary on a policy or account, you will not like the outcome if something happens to you. For instance, by law, your ex-spouse will receive all the beneficiary proceeds. I have had widows desperately contact me after their husband died, after finding out his ex-spouse is listed in the deferred compensation account and life insurance policy. However, there is nothing that can be done. It is required to locate the former spouse and distribute all funds to them.
- You do not list all your children. I cannot count the number times my client’s insurance policies did not list that last one or two children born to them. Fortunately, we are often in the office and ready to make the necessary additions.
Minor Children Beneficiary
You can list a minor child or grandchild or any other person under the age of 18 as a beneficiary. However, it is rarely the right thing to do. First, if you have listed a minor as a primary or successor beneficiary on a policy or account and you die before they reach 18, all of the proceeds will go to Probate and stay under the court’s control until they reach 18. Secondly, not many people want their children to receive large sums of money at that age, which is when Probate will release it all to them. As I like to say, 18 may be the age of majority but is rarely the age of maturity.
What you should do is name your Living Trust as the beneficiary until your child is over 18 and reaches the age you choose to receive the funds. Your Trust will provide for their education, care, and maintenance. All payments would be under the control of your chosen Trustee and private, outside the court’s control and expense.
No matter what age we feel is appropriate for our beneficiaries to receive their inheritance, there is no way of knowing whether they are going through a divorce, bankruptcy, or lawsuit at the time of your death. Listing your Living Trust as beneficiary protects against all of those risks with Spendthrift Provisions, preventing any creditor or spouse from claiming the gift of your estate.
If one of your beneficiaries acquires a disability through accident or illness before your death, your estate funds will go to the government for reimbursement for public benefits, or your beneficiary will lose their SSI or Medicaid benefits. You can prevent this from happening with a Living Trust that has precautionary Supplemental Needs provisions.
At the end of your life, or if you become incapacitated, if you have property or bank accounts in your name, they are at risk of Probate.
- A Will must be filed in Probate Court. The rule is no one can legally sign your name. Therefore, at your death, or incapacity, all assets in your name are subject to the full probate process, which averages 18 months and is costly.
- Living Trust completely avoids probate.
- A Living Trust estate plan includes both Health Care and Financial Power of Attorney documents and a Last Will and Testament for guardianship of minor children and to “pour over” any assets still in your name at your death, out of probate.
- Your life insurance policies and deferred compensation accounts can name your Living Trust as beneficiary, subject to essential tax considerations.
A Revocable Living Trust is a written, legal document that allows you to privately and efficiently pass your assets (real property, bank accounts, stock, saving certificates, personal property, etc.) to your family, friends, or charities after your death – outside of Probate Court. Your life insurance policies and deferred compensation accounts can name your Living Trust as beneficiary, subject to essential tax considerations.
This blog entry created for information and planning purposes. Therefore, it is not legal advice. Please do not use this blog as legal advice, which turns on specific facts, as well as laws in specific jurisdictions. No reader of this blog should act or refrain from acting on the basis of any information included in, or accessible through, this blog without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the reader’s state, country or other appropriate licensing jurisdiction