Make Sure Your Beneficiary Designations Match Your Estate Planning Goals

People often do not realize that their will or trust will not apply to certain property. Property that you own jointly with another person and accounts for which you have designated beneficiaries will pass upon your death to the surviving owner or named beneficiaries without application of your will or trust. It is important that these designations are kept up to date and are consistent with your estate plan goals.

Joint Ownership

When people own property jointly each person has an equal ownership interest in the property. If one owner dies, his or her interest immediately ceases to exist and the other person owns the entire property. Joint ownership can be a cheap and easy way to avoid probate since joint property passes automatically to the joint owner at death. Joint accounts work well when you want the other owner to have unlimited access and to inherit the account at your death, but there are potential problems:

• Risk. Joint owners of accounts have complete access and the ability to use the funds for their own purposes. Even if your child would never take funds without permission, the funds are available to the creditors of all joint owners. So if your child got divorced or was sued, the money could be available to the child’s creditors. Similarly, if a joint owner applied for public benefits or financial aid, the money would be treated as belonging to all the joint owners.
• Inequity. If you have one child on your account, that account will belong to the child upon your death. Meaning one child may inherit more than others. While you might expect that all of the children will share equally, and often they do in such circumstances, there’s no guarantee.

For some assets, wills, trusts and durable powers of attorney are much better planning tools. They put your assets at less risk and they provide for asset management in the event of incapacity.

Beneficiary Designations

When you open up an investment account or retirement plan or buy life insurance, the company encourages you to name beneficiaries who will inherit the property on your death. In determining how to make your beneficiary designations, the following are the considerations for each type of account:

• Bank and investment accounts.
  • If you have a revocable trust as part of your estate plan, you can make the trust the owner of all of your bank and investment accounts. This way you avoid the need to name anyone as beneficiary and you still avoid probate. Then, all of the protections provided in the trust – for instance, that children do not receive their inheritance until a certain age or provisions for who receives the funds if a beneficiary predeceases you – will apply to the accounts.
  • If you have a will, you can name the same people who will receive your estate under the terms of your will. Or, you have the option to name no one. If you do not designate a beneficiary, the account will pass according to the terms of your will and, while you won’t avoid probate, you’ll make sure that the people you want will receive the assets, that your personal representative will be in charge, and that any changes you make in the future will apply to the accounts.
• Life insurance. Unlike bank and investment accounts, the ownership of many life insurance policies – especially those that come as an employment benefit – cannot be transferred to your revocable trust. And there is really no benefit to doing so in any case (although there might be some tax and long-term care planning reasons to transfer property to irrevocable trusts). Instead, the beneficiary designation is the most important decision. If you have a revocable trust, you may name it as the beneficiary for the reasons mentioned above. Or you can name individuals of your choosing.
• Retirement plans. First, don’t transfer your retirement plans to your revocable trust. The only way to do so is to liquidate the plan first, which would be a taxable event. Second, don’t name your revocable trust as a beneficiary of your retirement funds without consulting your lawyer. In most instances, if your spouse is not the beneficiary, the retirement plan will have to be liquidated and the taxes paid within 10 years of your death. On the other hand, if you have a relatively small amount of funds in retirement accounts, this might not be a big problem. It is much more important with retirement plans than with life insurance or other investments that you designate a beneficiary, because there are different rules for different beneficiaries. If your spouse inherits your IRA, your spouse can treat the IRA as his or her own. Your spouse can either put the IRA in his or her name or roll it over into a new IRA. The rules for a child or grandchild (or other non-spouse) who inherits an IRA are somewhat different than those for a spouse. The beneficiary must withdraw all of the assets in the inherited account within 10 years. There are no required distributions during those 10 years, but it must all be distributed by the 10th year.

To review your beneficiaries, get a copy of all of your beneficiary designation forms. Check to make sure that your beneficiaries are consistent with the rest of your estate plan or, if they are different, that the difference is intentional. If you made these designations online, print a copy of the page. Once you have collected all of these forms, put them in a folder with your other estate-planning documents so that you and your heirs can quickly and easily find them in the future. To make sure that your beneficiary designations align with your estate plan and are as beneficial to your intended heirs as possible, talk to your attorney.