12th Feb 2014
All estate planning documents have one group of people who the estate owner has in mind: the beneficiaries. These are people who he or she would be happy to have their assets transferred to in the event of their death. Many people think that after having executed an estate planning document, they can keep the document under lock and key until it is needed. As an Orange County estate planning lawyer I know this would be the greatest estate planning mistake.
Tompkins stresses that estate owners must periodically review their documents because either their personal and / or financial circumstances change or something happens to one of their designated beneficiaries. If he does not review or update his beneficiary designations, then his last or most current intended beneficiaries will probably be holding an empty bag, instead of a piece of the estate. And people he doesn’t care for anymore may get the lion’s share of the estate. Here are several scenarios in which not updating the beneficiary designation will result in an unintentional transfer of assets.
Scenario: Estate owner remarries and has children with the new spouse
When an estate owner passes away without updating his estate planning papers to include a new spouse and/or new children, the ones who will get an inheritance would be the first spouse and only the children by that spouse (if they were the ones named in the document). Members of his new family will not receive anything.
Solution: The estate owner should have updated their Will or Trust to include the new spouse and/or new children as beneficiaries. An estate owner should still update their document even if they do not remarry. If they divorced the first spouse, hey may want to remove them as a beneficiary.
The bottom line here is divorce, annulment, separation, widowhood; remarriage and birth of new children are significant changes in one’s personal circumstances which should prompt an estate owner to update their documents.
Scenario: A primary beneficiary passes away before the estate owner.
If the estate owner did not indicate a replacement for their primary beneficiary, say, a spouse, the asset intended for the primary beneficiary will go into probate. It will also go into intestacy since there is no beneficiary explicitly designated to inherit that asset.
Solution: In preparing their Will or Trust, the estate owner should indicate a Secondary and even Tertiary beneficiaries. The Secondary Beneficiary will be the one to inherit the asset should the Primary Beneficiary pass away ahead of the estate owner. Likewise the Tertiary Beneficiary will be the heir if the Secondary Beneficiary passes away.
Scenario: A financial institutions changes ownerships either through merger or acquisition.
Note that this does not involve your estate planning documents. Nevertheless it can impact your beneficiaries. The new institution may drop or nullify the beneficiary designations of an account, especially if its an old account.
Solution: When this happens, contact the new financial institutions and have the beneficiary designations updated. When it comes to your financial institutions, insurance companies, mutual fund companies and similar institutions, an opportune time to review your beneficiaries is in February. This is after you have received your 1099 tax forms from the financial institutions where you have your assets placed. These forms generally include the contact details for the pertinent financial institutions. It would be prudent for clients of these institutions to contact them and apprise them of any updates in their beneficiary designations.
Scenario: Moving to a new company and transferring a retirement plan.
When you transfer retirement accounts from your previous company’s retirement plan into your current company or into an IRA, your beneficiaries lose any claim to the new accounts. In other words, the beneficiary designations are not automatically transferred to the new accounts.
Solution: Contact your new company or the IRA and inform them about your designated beneficiaries. It is also prudent to name beneficiaries in your IRA account because this will become a tax-saving move that will benefit your beneficiaries.
Scenario: Designate a minor child or grandchild as beneficiary
If the child is still a minor when you pass away, the court will appoint a conservator of your assets until the child becomes of legal age. This does not ensure that he or she will inherit your assets
Solution: If you want your child to be the heir to your assets, you should instead create a trust for his or her benefit. You can then use the trust – not the child – as the beneficiary. In this way, you control the conditions under which your intended minor heir has access to your estate.
Scenario: A beneficiary becomes physically or mentally incapacitated.
Without updating your estate planning papers, your beneficiary’s eligibility for Social Security’s Supplemental Security Income (SSI) benefits will be jeopardized.
Solution: Set up a Special Needs Trust for the benefit of the disabled person and designate the trust as the beneficiary on your accounts.
As the scenarios above illustrate, a person’s personal financial circumstances can easily change. All of these scenarios mentioned are reasons for you to review and update your estate planning documents, particularly your beneficiary designations. As an Orange County estate planning lawyer, I always advise my clients to review their beneficiary designations periodically. This guarantees that your assets will be transferred to the people you truly care for.