Beneficiary designations are an estate planning strategy that many people use, and for good reason. It is an effective, quick, free, easy, and direct way to pass on property. Many people have a lot of value in these assets, such as life insurance policies, IRAs, retirement plans and even bank accounts. Each of these assets allow the account holder to name a person who will receive the benefit of those assets after the account holder has passed away. This is often called a Transfer on Death, or Payable on Death beneficiary designation.
However, relying on beneficiary designations can cause problems. For example:
- If the person you name as your beneficiary is incapacitated at the time of your death, the life insurance company or financial institution may insist that a court supervises the funds. This is because they will not pay your assets to an incapacitated person, so the court will have to take over the funds until your beneficiary regains capacity or also passes away.
- Life insurance companies and financial institutes will likewise not knowingly pass your assets to a minor. So, if you name a minor to be your beneficiary, a court will have to appoint someone to manage those assets in behalf of your minor beneficiary before the minor can even receive the benefit of those assets. A guardianship is court-supervised and has all the normal court costs and procedures.
- If you name “my estate” as beneficiary, your assets will have to pass through probate for the court to decide who is your “estate.” By having your assets pass through probate, you are taking away one of the purposes of beneficiary designations, which is that it avoids probate.
- Your beneficiary designation proceeds will again have to go through probate if your beneficiary dies either before you or at the same time and you did not name a second or alternate beneficiary.
- To be frank, some people simply cannot handle large sums of money. They may be easily influenced by other people, they have large debts, invest poorly, get divorced, or waste money on conspicuous consumption. If you name such a person as beneficiary, there are situations in which they can decide to immediately “cash out” the asset, which may be against your design for the asset itself. Additionally, they of course will have a large amount of cash that they have complete access to and control over.
- Sometimes, an individual is named as the beneficiary of an asset with the “hand shake agreement” to use those funds to provide for someone else or to just hold that money for the future. Having such an “hand shake agreement” does not mean that it will happen; the temptation to just take and use the money may be too much. It is easy, but also potentially dangerous, to make such positive assumptions that your wishes will be carried out so easily.
- Several government aid options have a maximum income or asset limit, and surpassing that limit disqualifies someone from receiving that aid. If the person you name as beneficiary receives this aid, you may unwittingly disqualify them from continuing to receive those benefits.
- While this applies to a small percentage of the population, but if you have estate tax concerns, relying on beneficiary designations may handicap your ability to adequately plan for taxes and create tax liabilities for your loved ones.
Numbers 5 – 8 highlight some of the pitfalls that can occur after the beneficiary receives the funds.
Beneficiary Designations as Part of a Larger Plan
Again, beneficiary designations are important and have strong advantages. However, they alone should not be an estate plan. They are best when they are part of a more comprehensive plan, generally a trust-based plan. If you name your trust as the beneficiary of these assets, the problems listed above will generally not happen and all your assets (beneficiary designation assets and others) will be distributed to your beneficiaries in the same way. This will make the administration of your estate smoother and more cost-effective.
If you have questions or uncertainty about your beneficiary designations and who will receive your assets, I invite you to contact me or schedule a meeting for a complimentary review. You do have options to use your beneficiary designations to your benefit and still fulfill your goals. I hope to work with you to correct any problems and help you prevent any future problems to ensure that your goals are fulfilled.