Many people hold a good portion of their net worth, including most of their liquid assets, in accounts that have designated beneficiaries. Because these accounts are considered “non-probate” assets, ownership of these accounts pass to the designated beneficiary outside of the client’s will or revocable trust. Accordingly, reviewing current beneficiary designations is an integral part of any estate plan review. The following are two situations that we here at Smith Jadin Johnson encounter that require specific attention:
Children As Successor Beneficiaries
A common beneficiary designation lists the spouse as the primary beneficiary, and the children as successor beneficiaries. And this makes perfect sense—upon your death you want your spouse to have the assets, and then your children, should you survive your spouse. However, clients need to keep in mind that if their children are minors, a custodian will need to be appointed to hold the funds on their behalf until they are of legal age (typically 18). In addition, clients with children who are young adults (i.e., in their twenties), may not think it wise to leave a young adult with unfiltered access to such large sums.
To avoid this problem, not only should the client set up a trust for his or her minor and young adult children (either through the use of a revocable trust or a testamentary trust in their wills), but the client needs to ensure that once such trust is set up, his or her successor beneficiary designation is no longer the children, but rather the trust that is set up for the children. This way, the money that would have gone to the children directly now goes to the trust set up for the children, with the trust protections in place.
At Smith Jadin Johnson we can assist clients with drafting such trust beneficiary language and we work with many financial institutions in putting the proper beneficiary designation in place.
The Incapacitated Spouse
As stated above, many clients list their spouse as the primary beneficiary. For most situations this works without issue. However, clients need to be cautious of the situation when the spouse listed as the primary beneficiary becomes incapacitated. Upon the account holder’s death, the incapacitated spouse becomes the owner of the account. And because the spouse is incapacitated, doing anything with the account (e.g., rolling it over into the surviving spouse’s own account) can become problematic.
If you and your spouse have revocable trusts, one solution is to simply list your spouse’s revocable trust as the primary beneficiary. By doing this, the funds flow directly to your spouse’s trust, where the trustee then makes the determination on what to do with the funds pursuant to the terms of the trust.
If you and your spouse do not have revocable trusts, an easy remedy is to ensure that both spouses have in place a proper Power of Attorney. With a properly executed POA, the attorney-in-fact (often times a trusted child or relative), can make the financial decision on behalf of the surviving incapacitated spouse, and place the funds in the appropriate transfer account.
In sum, proper beneficiary designation on your accounts is the easiest way to avoid probate and pass your assets on to your loved ones. However, as this blog outlines, there are issues you need to be aware of. At Smith Jadin Johnson, we review all beneficiary designations with our estate planning clients and are ready to assist in reviewing yours as well.