Welcome to the inaugural edition of Short Takes. We envision a series of brief and provocative articles that might stimulate you to think about your personal planning. As with any generalizations, we strongly recommend that you discuss these topics with your financial advisors before implementing any ideas or making any changes to your personal planning.
This addition focuses on an often neglected part of estate planning – beneficiary designations. Let's make up a story to highlight the importance of the topic. John and Linda just signed their new wills and are happy to have the project behind them. They found the discussions about how to pass assets after their deaths to be tedious and stressful. But they feel good about having set up trusts for their children, providing for a few charitable gifts from their estates and tending to all of the other details necessary to have a complete plan. But a serious problem lurks.
When John went to work for Big Bucks Company 15 years ago, and before he was married to Linda, he filed a beneficiary designation for the small amount of group life insurance that was offered to all employees. He named his mother as primary beneficiary and his brother as contingent beneficiary. Now that he is an executive, the insurance death benefit has risen to $1 million. The beneficiary designation has never been changed.
The problem is easy to spot. The $1 million death benefit from the insurance policy will be paid to John's mother, if she is still alive, or to his brother as contingent. The new wills that John and Linda just signed can't alter the payment of the proceeds. Why? Because a will can only dispose of "probate assets". Assets that are owned jointly with another (and have rights of survivorship), like a house or a bank account, AND assets for which you name a beneficiary, are not probate assets. Instead, they pass at death to the joint owner or to the person named as beneficiary. The insurance death benefit is not a probate asset – it passes to the beneficiaries designated by John. Hence, at John's death, his mother will receive the death benefit, or if she is not alive, his brother will receive it. John's wife and children have no claim to it.
This is an obvious example. But when you consider that many of us own multiple assets jointly with others and assets for which we have named a beneficiary, you can see the extent of the challenge. Some examples of assets that are commonly owned in joint name are bank accounts, homes, brokerage accounts and even valuable personal property like art work. Examples of assets for which a beneficiary can be named are IRAs, 401K plans, annuities, life insurance policies and some bank and brokerage accounts (with a payable on death provision).
The moral of the story is that your estate planning isn't complete until you have identified all of your non-probate assets to be sure they sync up with your wills. You may have to change some beneficiary designations and/or change joint ownership of some assets in order to have your estate plan work as intended.
Our best advice is to make a list of all assets before meeting with your estate planning attorney, and ask for advice on naming the proper beneficiary. If you haven't reviewed your beneficiary designations in recent years, it may not be a bad idea to make an inventory and share it with your estate planning attorney to catch any problems now. Otherwise you risk having your well thought out estate plan compromised by non-probate assets.