How Account Beneficiaries Must Coordinate With Estate

How Account Beneficiaries Must Coordinate With Estate Planning Documents

Estate planning includes more than just having a will or trust. It’s a standard feature of modern life for people to plan the use of insurance policies, retirement accounts, bank accounts, and other accounts of various sorts. Such accounts can be tailored to pay out assets to specific beneficiaries. Beneficiaries are those who benefit from a given asset or account. Often, as in the case of life insurance, those beneficiaries are family members—whether life partners or children. But what few people recognize is how these accounts interact with other estate planning documents, such as wills and trusts—areas an experienced estate attorney can offer guidance.

Accounts with Beneficiaries

Among the types of accounts that payout to beneficiaries are, as mentioned, life insurance, 401Ks, IRAs, annuities, and so on. In the parlance of the law, the assets stored or created within these accounts can pass by beneficiary designation. Usually, the person who opens or creates one of these accounts designates who should receive the assets from it in the case of that person’s death.

Just on its face, one can see how this is a “will or trust-like” function—that is to say, it is testamentary in effect, if not in origination: the people you want to get some assets when you pass get those assets, assuming there are no other wrinkles.

Payable-on-death bank accounts and transfer-on-death securities (or stocks) work similarly—in that, again, the account owner designates a beneficiary during their lifetime. Then, when the owner passes, the assets of these accounts are transferred in ownership to the beneficiary.

What is important to note is that, in most cases, the beneficiaries of these accounts are designated within the constraints of the accounts themselves. A will’s disposition of assets will not affect this in the least. There is no way to “umbrella in” beneficiaries on these accounts or, for that matter, to cut beneficiaries as designees via one’s will. Instead, one must change the accounts themselves. For example, a parent buys a life insurance policy on which they name only one of their children, but have four children total. Even if, in their will, they state they want all of their assets distributed evenly among their kids. In this scenario, the will and the life insurance policy have competing language.

Nevertheless, the payout from the insurance policy will only go to the beneficiary named in the life insurance documentation. One might think, “Oh, well, we can just ask the one beneficiary child to distribute what she gets among her siblings.” However, such a scenario leaves room for complications, such as tax issues for the beneficiary child and siblings who obtained a payout. And, by the way, we have seen where a family member gets everything and decides not to honor the will’s or trust’s provisions. Read: relying on folks to “do right” is not the best plan!

Another example of good ideas which may go bad is a payable-on-death bank account that one designates to beneficiaries. It might work, but should one pass while the only living beneficiary to the account is an under-aged minor, issues will arise. For example, a bank will often require that a guardianship be established for the minor-beneficiary. In contrast, suppose the assets are handed over via a well-crafted trust. In that case, an experienced estate attorney will have made certain to suggest alternatives for who may handle the funds for the minor beneficiary until they become of age.

And what about if one were to designate their estate as the beneficiary? That’s a mixed bag too. It may work sometimes, but sometimes it will not. It is probably okay for assets like bank accounts, life insurance, and stocks. One example where it is not ideal would be in a situation involving an IRA account. The consequences of naming one’s estate as a beneficiary differ from what will occur if one were to name actual beneficiaries explicitly within the context of the account. A key consequence is negative income tax implications.

We Can Help Create an Estate Plan and Protect Your Beneficiaries

The best approach is to get help conceiving a complete estate plan, taking all account provisions alongside one’s will and any trusts that may need to be created. A good place to start your journey to get things right is attending one of Promise Law’s free estate planning workshops. These workshops provide a great foundation of information that everyone needs to make sound planning decisions. Moreover, if you attend a workshop, you also get a complimentary one-on-one consultation.


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