You may have heard the horror stories of officers who divorced and never changed their insurance policies, deferred comp beneficiaries, or estate plan, and the ex-spouse got it all. It is easy when hearing dramatic stories to assume you are safe. But are you?
There are various reasons why your listed beneficiaries might not fit your current intentions. It can also prove costly because of circumstances beyond your control.
It is very common to have beneficiary names listed on policies and accounts that are not current to your wishes. The chances are you have beneficiaries listed right now, including a person you no longer wish to receive the benefit, or it excludes someone.
Here are some examples:
- Previous marriages: That is an easy one. However, please know that when you die, the beneficiary on any legal document will receive the proceeds of that policy, account, or estate plan. I have had those phone calls from surviving spouses who discovered the ex on policies after their spouse died.
- Not listing all your children: You took out the insurance policy years ago before having that second or third child.
- Intentionally listing only one child: You figure that child will take care of their siblings. That mistake is widespread. However, the child you list has legal ownership. What if the child’s spouse has different ideas? Or before making distributions to siblings, the beneficiary child dies. All the funds are now part of that child’s estate. The funds could end up in the beneficiary child’s divorce, lawsuit or creditors claim. Then there are possible gift taxes when making distributions depending on the tax code at the time.
- Countless clients were in one of those or other situations as we reviewed their assets and policies during their Living Trust signing. Fortunately, they were still around to fix it.
Minor Children Beneficiaries
Suppose you have listed a minor as a primary or successor beneficiary on a policy or account. Unfortunately, you die before the minor reaches 18 years of age. If so:
- If you die before the minor reaches the age of 18, all of the proceeds will go to Probate. The assets stay under the court’s control until the minor is 18.
- Secondly, not many people want their children to receive large sums of money at 18; when Probate will release it all. 18 may be the age of the majority; however, it is rarely the age of maturity.
One of my favorite truths is that the human brain does not fully form until age 25. Everything is there except the frontal cortex, which governs reason. And that explains a lot! That fact should also inform your decision about the final distribution age of all funds. A Living Trust best accomplishes a sensible distribution strategy.
A Trust protects the funds outside of Probate. The minor can receive distributions before age 18 for health, education, and welfare at the discretion of your chosen Trustee. You chose the final distribution age.
Beneficiary Financial Troubles
No matter what age you feel is appropriate for your 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.
If you name your Living Trust as beneficiary, the Trust protects against all of those risks. A Trust’s Spendthrift Provision prevents any creditor or spouse from claiming the gift of your estate.
Beneficiary Disability Issues
Suppose one of your beneficiaries acquires a disability by accident or illness before death. In that case, your estate funds will go to the government to reimburse public benefits. Or your beneficiary will lose their SSI or Medicaid benefits.
You can prevent this from happening with a Living Trust with precautionary Supplemental Needs provisions.
At the end of your life, or at incapacitation, if you have property or bank accounts in your name, they risk Probate.
- A Will must be Probated. The rule is no one can legally sign your name. Therefore, all assets in your name are subject to the probate process, which averages 18 months and is costly.
- A Living Trust completely avoids Probate.
- Your financial accounts, life insurance policies, and deferred compensation accounts can name your Living Trust as beneficiary, subject to essential tax considerations.
- A Living Trust estate plan includes both Health Care and Financial Power of Attorney documents. It also consists of a Last Will and Testament. A Will is necessary for guardianship of minor children. It also transfers assets in your name out of Probate.
Tom Tuohy is the founder of Tuohy Law Offices.
This blog entry is created for information purposes. Therefore, it is not legal advice. Please do not use this blog as legal advice, which turns on specific facts and laws in specific jurisdictions. No reader of this blog should act or refrain from acting based on 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.