You are a planner. You’ve met with your estate planning attorney to make sure your wishes are documented and to minimize the headaches associated with probate for your survivors. You’ve also met with your financial advisor to make sure your financial goals are on track.
Everything looks great, but then you get divorced. As you pick up the pieces and move forward with your life, you forget all about those pesky beneficiary designations you so carefully took care of once before. Now your life insurance policy still has your ex-husband’s name as beneficiary. Should something happen to you before you get a chance to update that beneficiary designation, your ex-husband (and his new wife and her kids by extension) will be most appreciative.
It is of vital importance to any estate plan to stay up-to-date with your beneficiary designations and to properly name your beneficiary designations in the first place. This can avoid headaches and hardships for your intended beneficiaries, reduce costs by avoiding probate, and, most of all, honor your true wishes.
Montpelier resident, Gabriel Lajeunesse, who is a Financial Advisor with Edward Jones, also described situations where people may have opened accounts a long time ago and may not even remember who was designated as a beneficiary. He advises that, in order to efficiently and effectively control and locate your accounts, you may consider consolidating them into one convenient place. You should discuss this with your financial advisor.
Other real-life scenarios where issues with beneficiary designations can arise:
Deceased Beneficiary: If you named a beneficiary who is now deceased, be sure to update that beneficiary designation. Otherwise, if the person named was the sole beneficiary listed, the proceeds of that asset will need to go through probate court to determine who will receive the proceeds.
New Family Members: If your family has grown since the last time you’ve updated your beneficiary designations, don’t forget to take them into consideration.
Minors: A minor who is named as a beneficiary will have their assets managed by their guardian until the minor turns 18. The guardian will typically be the surviving parent, or it may be someone you named in your Will as appointed by a judge. What if the surviving parent is someone whom your child hasn’t seen for five years or someone who is financially reckless? To have someone besides the guardian manage the assets, consider creating a trust and designating the trust as the beneficiary. For example, the trust instructions may include that the trustee can use the funds to provide for your child’s maintenance, support, and education, then the trustee can distribute the remaining funds when the child is of a certain age, such as 25 years old.
Spendthrifts: For adults who can’t manage their own finances, naming them as a beneficiary is probably not a good idea as the funds won’t last or may be given away to his closest 100 friends. Instead, a trust can be used to manage assets for him for a longer time period or for the rest of his life.
Disabled Family Member: A disabled family member who is a recipient of Medicaid or SSI (or who may become a recipient when they become an adult) can suffer unintended consequences if they are named as a beneficiary. This is due to strict limits of resources that Medicaid and SSI allow an individual to have in their name and still receive these key government benefits. To avoid a loss of benefits, a better solution is to create a special needs trust for the person’s benefit and have all the beneficiary designations point to his or her trust, the assets of which won’t count against the person as a resource for Medicaid and SSI.
Ambiguous Charities: When you selected “People’s Front” as a charitable recipient, did you mean “The People’s Front of Judea” or “The Judean People’s Front”? First, before naming a charity as a beneficiary, it is important to get information directly from the charity on how the designation should read. The second thing you should do is watch Life of Brian (great movie).
Automated systems: You should avoid do it yourself programs where beneficiary designations are pre-filled out for you as it can be easy to forget to check this information yourself.
In summary, by ensuring your beneficiary designations are in good order, you can avoid potentially complex situations and, therefore, truly honor your wishes.
**By Claudia I. Pringles, Esq. Originally published in March 20th-April 2nd edition of The Bridge**