Estate plans involve a number of different types of assets, including real estate, personal property, and retirement assets. Each asset is handled in a different manner, depending on whether the property owner has a last will and testament or a revocable living trust.
If a person has a last will and testament, most of their property will be handled in a probate legal proceeding. The deceased individual’s home, car, and personal items are the most common types of property that are handled through probate.
Other assets are considered non-probate assets and go directly to a named individual outside of probate. This non-probate transfer is done through beneficiary designations. However, these designations should not be handled lightly. They need to made with careful deliberation and planning.
The types of assets that are handled by beneficiary designations include life insurance policies, IRAs, retirement accounts, pensions, and even bank accounts. Designating a beneficiary is an easy and free way to handle how these assets are transferred. It can seem too good to be true, and many times, it is a very simple process. However, not everything is always so simple, and certain problems can arise, which are discussed in more detail below.
Minor as Beneficiary
Many people like to name their children as their beneficiaries on certain accounts, and while that thought can be well-placed, it may not be wise. Just as life insurance and financial institutions will not knowingly pay to an incapacitated individual, the same applies to a minor person. They may not even pay the money to another person on behalf of the child, including a parent, due to potential liability. For this reason, they will normally require proof of a court-supervised guardianship for that minor before approving distribution of the money, even if that named person is that child’s parent. It can seem counter-intuitive, but most institutions will insist upon it.
Naming the Estate as Beneficiary
Some individuals will choose to simply put “my estate” as a beneficiary. The problem with this is the court will then need to determine who “the estate” is, which will require the probate process to distribute the funds.
Sometimes the unthinkable happens, and the beneficiary that is named in the policy is incapacitated and not able to accept the funds. If the property owner dies and the named beneficiary is incapacitated and not able to accept the money, the court will likely need to take control of the funds. It can help to have a secondary individual named or have a trust named as beneficiary in the event that this situation occurs.
It’s possible that the beneficiary died first, or at the same time as the account holder. If the person does not have a secondary beneficiary listed on the account, the proceeds of the account will still need to go through probate and be distributed along with the remainder of the deceased individual’s property.
Beneficiary Receiving Government Benefits
If a named beneficiary is receiving government benefits, such as a child or parent who requires special care, receiving this lump sum of benefits could jeopardize that person’s ability to receive government benefits. This should be considered before naming an individual.
When meeting with an estate planning attorney, it is wise to not only discuss assets that will be probated but also assets that have beneficiary designations. Some clients choose to name their trust as a beneficiary, which can help eliminate some of the above-mentioned issues.
For example, if the beneficiary is a minor, is incapacitated or dies, naming the trust as beneficiary can avoid many of these complications. Always discuss all assets with an estate planning attorney during those initial meetings to ensure that the beneficiary designations are properly selected.
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