San Jose Santa Clara Milpitas Estate Planning Business Law Attorney Blog

Tuesday, November 16, 2010

Pay Close Attention to Beneficiary Designations

An often overlooked, but critical decision in estate planning is the completion and determination of your beneficiaries. This includes assets such as retirement plans, IRAs, life insurance policies, and annuities. 

One of the pitfalls in estate planning is not completing these forms properly, which has an adverse effect on your plan. Assets that have beneficiary forms are normally contracts, and a company is obligated to pay the funds to a beneficiary at the death of the owner of the account. These assets pass directly to your beneficiary, and not by your will, not to a trust, and perhaps not to the intended beneficiary of the account if you haven’t designated that person correctly.

For example, you may be single and have a minor child who is selected as your beneficiary. This basically means that your child has a right to receive the assets. However, since they are a minor, they are not able to collect the assets upon your death, and the insurance company may require a formal guardianship or conservatorship proceeding within the Probate Court. This process could be expensive, time consuming, and public. 

In addition, the guardian will have to account annually to the court, based on the requirements of that particular court system, and the annual accountings are also public and often expensive to produce and file. To further complicate the issue, once your child turns 18, they are no longer deemed to be a minor, and they have the right to receive all of the assets in a lump sum. It is likely that you prefer to have those funds held by a trustee, invested, managed, and distributed at other times, such as possibly one-half at twenty-five and one-half at thirty, or for upon graduation from college.

There are larger and more significant problems though when a beneficiary of a retirement plan is not completed properly. While life insurance is normally not income taxable, (although it may be included in the estate for estate tax purposes,) most retirement plans are assets that have been tax-deferred but are not tax-free. This means that your beneficiary will be receiving those assets outright and also be subject to income taxes. There are several retirement plan options where your beneficiary may make an election to either have the funds distributed over a period of years, within a five-year waiting period, or in a lump sum. There may also be a means of having those taxes minimized and stretched out over a period of years that will allow more funds to be invested, rather than having the tax paid initially and your beneficiary receiving a significantly smaller amount of assets. 

An additional significant problem comes in when you’re divorced, whether you’re remarried or not, and the initial beneficiary of your plan or policy is your divorced spouse. Since this is a contract, many state laws and courts have taken the position that those assets will pass to the ex-spouse even though that is clearly not the intention set forth in a separation agreement or judgment of the court. 

Therefore, whenever there is a life cycle change such as a birth, death, divorce, adoption, etc., all beneficiary forms should be reviewed to be sure that the beneficiary is stated correctly. Also, if you have created a trust, and that trust is no longer in existence, this may affect your overall estate plan and how your assets are distributed. Likewise, it is important to be sure that all existing beneficiary forms are coordinated with any new trust or will. 

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The lawyers at Sowards Law Firm assist clients with Estate Planning, Wills, Living Trusts, Probate, Estate Administration, Medi-Cal Planning, Business Law and LLC Preparation throughout California, including clients located in and around, Oakland, Palo Alto, Petaluma, Pleasanton, Point Reyes, Redwood City, Richmond, Salinas, San Carlos, San Francisco, San Jose, San Leandro, San Rafael, San Ramon, Santa Clara, Santa Cruz, Santa Rosa, South San Francisco, Sunnyvale, Union City and Vallejo.

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