Your last will and testament is a document designed to give certain courts and your family directions on how you would like your estate to be distributed in the event of your passing. It gives you the power to determine what will finally happen with your property when you are gone, giving you one final say in who gets what and why.
Yet, some wealth is generally not transferred through a will, and other wealth can be transferred directly onto certain beneficiaries before going through a will. If you are the holder of a bank account, retirement fund, IRA, investment account, or life insurance plan, the chances are that you may have designated beneficiaries to one or all of these at some point in your life, and it may be high time to review those designations and see whether they are still in your best interest.
Alternatively, you may be looking into creating an account of this nature or want to designate a beneficiary to some property and would like to do it right. In any case, the most important thing to note about naming beneficiaries is that when you do, your will does not control the disposition of that asset. Wealth and property transferred to a designated beneficiary through POD/TOD clauses, joint tenancy, a living trust, or other such methods will not pass through probate.
For most people, this is good news. The less you have going through the probate process after your passing, the better. Not only is probate a matter of public record, but it can be both time-consuming and expensive, especially in California. However, naming beneficiaries for your accounts, funds, trusts, and properties is not a task to be taken lightly. Here are a few commonly made mistakes you should avoid when looking to secure your wealth and legacy.
Naming Minors as Beneficiaries
A common mistake often made when naming beneficiaries for accounts and properties is naming beneficiaries far too young. For one, you risk handing control over to the child’s guardian rather than them because minors are not given access to life insurance policies and investment funds.
On the other hand, if your beneficiary is still young when they receive their inheritance, chances are quite high that they might make unwise financial decisions. Unless you are very confident in the financial wisdom of your teen or young adult beneficiary, it is best to enlist someone else as beneficiary or have these accounts transferred into a revocable trust.
Through a trust, you can provision control over the funds in an account so that your beneficiary will receive a certain sum every year until they are of the appropriate age to deal with the whole fortune. You can, of course, trust your beneficiary to have the financial knowledge necessary to properly take care of the contents of a life insurance policy, especially if you take steps to instruct and teach them yourself. However, there is nothing wrong with erring on the side of caution.
Naming One Beneficiary for All Accounts
Some parents make it a habit to name their eldest as the beneficiary of all their accounts, trusting in them to properly distribute and provision the funds necessary to the rest of their siblings. However, this is not always the case. Especially with an outdated estate plan, you run the risk of adding fuel to the fires of strained sibling relationships by giving one child full control of the inheritance, essentially giving them free rein to distribute the money as they see fit.
Beyond that, it can bestow upon them the tax burden of gifting the account’s contents to their siblings at a high cost unless they trickle the inheritance year after year. Instead, include all your children as beneficiaries, and be specific. Do not name one child per account, either. This may end up in complications if the total value of each account varies drastically when you pass away. Naming each of your children for every account ensures balance.
Naming Your Child as Co-Owner of an Account
Some parents name their children as co-owners of certain accounts – such as investment accounts – instead of naming them beneficiaries. The issue with this is that instead of being taxed based on inheritance, naming someone a co-owner is essentially “gifting” them half the account, which can put a hefty tax on that individual if the account’s value exceeds the double value of the current annual gift tax exemption.
Furthermore, it can create complications if you or your children have judgment creditors that try to levy an account in both of your names. As it stands today, creditors cannot come after the wealth of an indebted individual’s offspring – in most cases, at least. Keeping your accounts separate is in the best interest of your child.
Naming a Disabled Individual as a Direct Beneficiary
Perhaps the people you wish to help the most are those in the family who can do the least for themselves – people with special needs or disabilities restrict their ability to work. However, naming them as beneficiaries can create a completely new problem because it can exempt them from government benefits.
It is much wiser to leave personal instructions to your child or relative’s caretakers or their specialized attorney that part of your estate is to go towards them and their care while letting them take advantage of their government benefits to support them.
Otherwise, they may have to rapidly spend the inheritance to regain a steady source of financial support and go through the process of reapplication, creating a hassle rather than offering a financial gift.
Not Updating Outdated Beneficiaries
Life can change drastically, and many life events may disqualify some individuals from your list of beneficiaries for personal reasons. Divorce or breakups in the family are significant times for reviewing and amending estate plans, lest you end up giving a part of your estate to an estranged ex-spouse.
Not Updating Deceased Beneficiaries
Aside from making the mistake of having no estate plan at all, many make the mistake of rarely updating their estate plan. It should be common practice to meet up with your lawyer and discuss your estate plan whenever a major event in the family occurs – marriage, birth, death, divorce. These are just a few examples.
When it may be important to reconvene and reconsider previous choices, it may include moments of financial trouble or legal trouble. Your estate plan should largely be amendable, revocable, and flexible. It is vital to make use of that fact to adjust it according to the current reality, rather than giving your family a nasty surprise with a heavily outdated estate plan right after the tragedy of your death.
Some estate planning tools, such as living wills, are more difficult to amend than others. But changing your beneficiaries is quite simple and can easily be done in most cases even without the help of a legal representative. Consider reviewing your estate plan not just once every blue moon but once or twice a year and after every major life-changing event. Your children and grandchildren may thank you for it years into the future.