July 28, 2017
Estate Planning- Beneficiary Designations
Beneficiary designations have been points of dispute since their appearance on the estate planning stage over 100 years ago. Certainly, the ability to name a beneficiary for an account, or an insurance policy, or a brokerage account can be an immense time saver and efficient use of paper. On the other hand, if a situation becomes more complicated or the account holder’s goals are more complex than naming a simple beneficiary, the beneficiary designation form may not suffice.
This article will review some of the basics of naming beneficiaries and will then offer an overview of more complex situations and some alternatives to naming beneficiaries.
Most situations are ideally suited to the simplicity of naming beneficiaries. An individual wants to name a spouse as beneficiary of a financial product and it is done.
Even the bit more complicated situation of an individual who wishes to name multiple beneficiaries remains relatively easy for all involved. For example, if an individual has three adult children who are competent, the individual simply names the individuals as beneficiaries.
The situation becomes murkier when a potential beneficiary might not be eligible or may not want the benefits. For example, if a spousal beneficiary is on medical assistance, it may not be in the best interests of the individual spouse to be named as a beneficiary. Other solutions should be sought.
If an individual wishes to name his children as beneficiaries but one of them is in rehab for drug addiction, that child should probably not be a named beneficiary. Other solutions should be sought.
If an individual wishes to name multiple beneficiaries but not in equal shares, complications might ensue. To try to adjust percentages to be 50, 30, and 20 for three beneficiaries sounds easy, but it adds another layer of complexity to the process. Other solutions should be sought.
If an individual wishes to name multiple primary beneficiaries and then contingent beneficiaries, this can usually be easily accomplished. But if one of the primary beneficiaries becomes unfit to be a beneficiary due to death or some other circumstance, is it understood that the contingent beneficiaries will likely still not receive any interest in the property? Other solutions should be sought.
If an individual wants to name a beneficiary of a large amount of money but the money is to be given over a period of time, then a beneficiary naming might not be the best method to accomplish this goal. Other solutions should be sought.
As noted in the examples above, other solutions usually come into play when the individual wants to do something different from the straight forward naming of a beneficiary. And of course, there can be any number of reasons for wanting to bequeath property in a manner that is different from a direct gift. What other solutions exist?
- Naming an heir in a will. Drafting a will is probably the easiest and gives the most latitude in describing how an heir should receive property. Wills have a bad reputation for being expensive and involving an attorney for drafting purposes, but the engagement of professional counsel often helps keep the cost down rather than inflate it because the situation will be set up properly on the front end, eliminating confusion and problems at the time of actual distribution.
- Establishing a trust. We have discussed trusts and their uses in previous newsletters, so I won’t get into the details of a trust, other than to offer that a trust provides significant flexibility in the estate planning process.
- Establishing a business entity to gift portions of ownership in the business to the heir. A business entity such as a corporation, or more commonly, a limited liability company, can hold property and then percentages of ownership of the LLC may be gifted to certain individuals. This gifting can be done inter vivos, while alive, or through a will to be executed upon death.
These are some situations for your consideration in your estate planning process. As always, if I have not seen you in the past 3-5 years regarding any planning we have done previously, I would urge you to contact me to review. There may be changes in your life that require changes to your planning.
If you are interested in discussing these ideas further, please contact our office to set an appointment. We look forward to seeing you and hope all is well with you until then. Thank you.
This article does not intend to provide any tax or legal advice but suggests that you contact an appropriate professional to consult with on your specific situation and whether these ideas meet with your goals and objectives.