Dear SharonAnn – I remarried nine years ago, and we are working on our wills and trusts. He has children; I have children; and we have a child together. It is complicated trying to treat everyone fairly. We did our family trust and individual wills, but now we are arguing about beneficiary designations. He says the trust and wills take care of everything, and I say the beneficiary designation rules. Who is right? Signed,
Perplexed Hello, Perplexed! Strangely enough, it depends on your state of residence and whether you are divorced or widowed. Some states have a ‘revocation of non-probate assets upon death statue’ that can displace an old beneficiary designation. Non-probate assets include checking and savings accounts, qualified and non-qualified retirement plans, IRAs, individual or group life insurance policies, annuities, mutual fund accounts and certificates of deposit, and they can pass by ‘will substitute’ such as ownership title or beneficiary designations. However, for the most part, the written beneficiary designation form rules. It is imperative for you to look at your beneficiary elections with your professionals at each life-changing event: births, deaths, divorce and retirement. Some beneficiary designations are prohibited after a divorce because the designation is a part of the divorce decree. Other changes that may require revisions or updates include having a new grandbaby. It is likely that you will want that baby to inherit your son’s or daughter’s portion should either predecease you. Ignoring this important responsibility can lead to unintended consequences, horrible ones. Picture this: You die, and your ex, whom you intended to get nothing more than the divorce settlement, was able to receive all your company pension benefits and proceeds from your life insurance policy instead of your children. Imagine they disagreed and brought the case to court and lost, incurring huge expenses in the meantime. The point is this: Do not depend upon your divorce decree or will to override outdated beneficiary designations. If you are married and live in a community property state such as California, then you will need your spouse’s consent to name any others as beneficiary. Your advisors will likely encourage you to name contingent beneficiaries in case you and your spouse die at the same time. Without naming contingent beneficiaries, the funds most likely will fall into your estate and undergo probate. Unfortunately, in the area of life insurance beneficiary designations, it is easy to mess up. Watch out for these:
• Naming a minor child (minor children will be given a court-appointed guardian). It is better to name a person to act as trustee and a trust to benefit the child.
• Making a dependent ineligible for government benefits (a dependent with special needs will be disqualified from government benefits if they receive anything more than $2,000). Ask your attorney about a special needs trust.
• Omitting your spouse in a community property state (you can name anyone as beneficiary; however, you must get your community property spouse to sign a waiver)
• Structuring a policy incorrectly (Life insurance death benefits are tax-free except when three different people play the role of policy owner, policy insured and policy beneficiary. The trap could result in gift tax if the gift exceeds the federal limits.)
• Assuming your will dictates insurance policy outcomes (Not true. The beneficiary designation form on file will triumph.)
• Updating your designation with life changes – death, divorce, added children or grandchildren
• Keeping your paperwork secret (open communication with your family members will reduce drama later, both in communicating your intentions and where the policy resides. It would amaze you to know of how much unclaimed life insurance proceeds are lost due to heirs not knowing about policies.)
• Giving money outright to untried, untrained young-adult children
• Naming only a primary beneficiary (discuss contingent beneficiaries with your agent/attorney)
• Failing to name a beneficiary (heirs may face long waits through probate and assets are not protected from creditors) The greater your dynasty, the more potential for errors in beneficiary designation forms. If you have children, your new wife has children from a former marriage, then you have children together, then they all get married, have children, get divorced and make new families, you can see the potential nightmares in the future. You might consider creating a customized beneficiary designation. Your attorney will help you draft one that honors your intentions. Some choices here are inheritance per-stirpes (deceased heir’s share goes to his/her heirs) or per-capita (deceased person’s share divided among your successor heirs), or you could use a trust, with the help of your attorney. Beneficiary designation forms are a vital part of your estate plan. As you can see, there are many mistakes you can make. The best protection you can offer your heirs is to get copies of each insurance, annuity and retirement plan beneficiary form and review them with your attorney and your financial planner. The Retirement Concierge offers private personal management services as a team member of attorneys, CPAs and financial advisors. We do not offer legal, financial or tax advice. We also wrote A 10-Step Action plan for Defining Your Mission helping Boomers on the verge of retirement to plan, make and manage life transitions by guiding them through a systematic process of discovery and re-creation where they write their own rules, make their own plans and reinvent their own lives. TheRetirementConcierge.com, (619) 818-8575.