How Important are Beneficiary Designations in an Estate Plan?
Why must I make sure my accounts are titled correctly?
BENEFICIARY DESIGNATIONS AND TITLING OF ACCOUNTS
It is very important to make sure the beneficiary designations on your retirement plans, life insurance policies, certificates of deposit, etc. are dovetailed to complement the estate plan you put in place. If you do not follow through with changing the beneficiaries of these types of assets when you create your estate planning documents, then you might as well throw what you have created in file 13 (the trashcan) because more than likely the plan you put in place in your estate planning documents will not be funded on your death. This will be the result because your assets will be aimed to individuals other than the individuals you name in your Will and/or trust, or the assets will be distributed outright to such individuals instead of being placed in an asset protection trust which would have protected such assets from personal judgment creditors of the beneficiaries, kept the assets inside the trust as separate property in the event the beneficiary obtains a divorce at a later date, and continue such assets in trust for the benefit of each beneficiary's descendants thereby avoiding probate and estate tax in such beneficiary's estate.
Another action item an individual needs to be aware of when implementing an estate plan is to make sure the titling of accounts in such individual's estate follows the plan that was created. For example, if a married couple created future tax planned asset protection Wills with children's trust, then any security accounts and/or large cash accounts should be titled as tenants in common between the couple rather than as joint tenants with rights of survivorship. This type of titling is needed because the deceased spouse will want to force one-half the value of each of these types of assets into the irrevocable asset protection trust created for the benefit of the surviving spouse. This type of trust may be treated as a bypass trust and/or a marital deduction trust. The bypass/marital deduction trust planning would be the estate tax planning part of the trust. However, we never let the tax tail wag the dog. The really important part of the trust would be the fact it would be protected from creditors during the lifetime of the surviving spouse, kept as separate property if the surviving spouse remarried, and it would bypass probate and estate tax (if treated as a bypass trust) in the surviving spouse's estate to ultimately be distributed where the first deceased spouse desired the assets to go on his/her death. If the assets were given outright to the surviving spouse via right of survivorship, and if the surviving spouse failed to timely file a qualified disclaimer of such assets which would normally cause the assets to be funneled into the asset protection trust described above, then such assets will not enjoy the above stated protections and there would be no way to guarantee any portion of those assets would go where the deceased spouse desired them to go on his/her death.
When you have retirement plans, life insurance policies, certificates of deposit, or any other type of asset that passes by beneficiary designation to a designated individual, it is very important to make sure you have filled out the beneficiary designation forms correctly. I recently came across a beneficiary designation form in which the decedent had named her two children, in separate, equal shares, as the beneficiary of her substantial retirement plan. Well one of the children needed to disclaim the interest going to the child due to personal reasons and both of the children assumed when the disclaimer was filed with the financial institution that the disclaimed child's interest in the retirement plan would flow to such child's descendants (minor children, in trust). This is a natural assumption. However, contrary to what the children thought would occur, the children found out if an account owner did not specifically state on the beneficiary designation form after each beneficiary's name the words "per stirpes and not per capita", then the financial institution's default language in the beneficiary designation was to ignore the descendants of a deceased (disclaiming) beneficiary and pay 100% of the proceeds to the other named beneficiary. This was shocking to the children because they knew their mother would not have wanted her minor grandchildren from the disclaiming child to be disinherited from this plan. Luckily we were able to assist the children by creating a family settlement agreement which made it crystal clear this was not the intended result. In such agreement the child who received 100% of the retirement plan proceeds agreed to cash in half the plan with the estimated taxes being withheld, and then place the net proceeds of the half in trusts created in the decedent's Will for the benefit of the minor children. This was a disaster that was averted. However, sometimes such a disaster is not corrected due to greed. This was the case in another retirement plan scenario. In this other scenario, the retirement plan was in the form of a 401(k). In that case the decedent had named his children the beneficiaries of his 401(k). Well, after the decedent made this beneficiary designation he got married to a new spouse. The decedent never changed the beneficiary designation on his 401(k) after his marriage because he assumed the plan would go to his children on his death. He did not want his new wife to receive these proceeds. A few years later the decedent passed away. When a claim was made on the 401(k) plan by the decedent's children, the children found out the new spouse had notified the plan administrator of the marriage. This notification resulted in 100% of the 401(k) plan being paid to the new spouse because under federal law a spouse is the primary beneficiary of a 401(k) plan when an individual marries. The only way to change that designation is to fill out a new beneficiary designation and have the new spouse sign a waiver on such form agreeing to waive the right to be the primary beneficiary on the plan. This will then allow the owner of the plan to name as beneficiary whomever he/she desires. Therefore, remember it is very, very important to make sure the beneficiary designations on your plans mirror what you desire in your estate. Please feel free to schedule a free consultation with one of the lawyers in our firm to discuss this matter in further detail. All these questions and more may be answered in such consultation.