McClellan Legal LLC Estate Planning & Tax Assessment Blog

Friday, January 3, 2014

Beneficiary Designations – Don’t “Set it, and forget it!”

When developing your estate plan, I do not recommend following Ron Popeils catchphrase of “Set it, and forget it!”  Estate planning requires a coordinated effort of drafting and reviewing various documents to ensure that your assets are distributed according to your wishes. 

Beneficiary Designations for Non-Probate Assets

Most people are well aware of the importance of executing a will to distribute their assets to their loved ones.  Assets that pass via your will are distributed via a court supervised process known as probate.  These probate assets include all property individually owned by the deceased that do not include a designated survivorship interest.  However, some very high value assets, known as “non-probate” assets, do not pass through the ordinary probate process, but pass via contract law. 

Some of the most common non-probate assets include: life insurance payouts, retirement accounts (IRAs, 401ks, etc.), and annuities.  While not the subject of this article, other non-probate assets include real property (e.g., your personal residence) owned via Joint Tenancy with Right of Survivorship (JTWROS) with another person or by Tenants by the Entirety between a husband and wife. 

The non-probate assets discussed in this article are distributed according to a written beneficiary designation that specifically identifies the recipients.  These designations include payable on death ("POD") accounts, transfer on death ("TOD") accounts, and in trust for ("ITF") accounts.  A beneficiary designation following contract law trumps instructions defined in a will. 

Strategically setting your beneficiary designations is often an overlooked aspect of estate planning.  Most people take the “Set it, and forget it!” strategy to assigning beneficiary designations.  That is, they designate someone to receive their assets when they set up their account and then forget to periodically review their designations as their life changes. 

Potential Problems

All too often the initial designee on their account is not consistent with their current wishes.  For example, many unmarried people will name their parents or a sibling as the designated beneficiary of their employer sponsored life insurance policy.  However, when they get married, they forget to change the beneficiary designation to their spouse.   

Other potential problems arise when the named beneficiary does not survive you.  In those situations, the asset is distributed to the “estate”, which may cause undesirable consequences, including: additional vulnerability to creditors, increased estate/inheritance taxes, and non-optimal stretch-out of retirement accounts.

Further, even if you properly designate your spouse as the initial beneficiary and your children as the successor beneficiaries, your estate plan can still fail.  That is, if your spouse does not survive you, then your children will receive the distribution outright as soon as they reach the age of majority.  Do you really want your young “adult” children to have full access to such large assets as your retirement accounts?  Better planning would likely direct your children’s distribution to testamentary trusts designated in your will or Revocable Living Trust to preserve the assets from their own immaturity, potential creditors or potential predators.

We understand the importance of coordinating all of your assets, including non-probate assets, into your estate plan and periodically reviewing your plan to ensure that it remains effective.  It will be our pleasure at the Law Offices of James S. McClellan to discuss your specific circumstances and design/implement an estate plan that aligns exactly with your goals.

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McClellan Legal LLC is located in Kennett Square and serves clients throughout the areas of Avondale, Chadds Ford, Coatesville, Downingtown, Landenberg, Oxford, Phoenixville, Pottstown, West Chester, & West Grove.

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