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Marc A. Hebert's Money Sense: Beneficiary designations can be the trump card of estate planning

By MARC A. HEBERT
April 06. 2018 8:28PM




Picture this: a frantic call to the family lawyer by a recent widow, who we'll call Fran. Fran has just learned that the life insurance proceeds from her deceased husband, Ed, are going to be paid to his ex-wife, Sally. As Ed's current wife, shouldn't she, not Sally, be entitled to the proceeds? Ed had changed his will to make Fran the beneficiary of his entire estate. Doesn't this change the policy designation as well?

As Fran found out from her lawyer, depending on state law, beneficiary designations can be the trump card of estate planning. Sally will receive the life insurance proceeds. With certain financial instruments, the beneficiary designations control the asset dispersion regardless of other provisions, such as those in a will. Given this, here a few points to keep in mind:

Assigning and periodically reviewing your beneficiary designations is one of the most important concepts of estate planning.

Assets whose beneficiary designations trump wills or estate directives include:

. Individual and group life insurance

. Traditional and Roth IRAs

. Qualified Retirement Plans, 401(k) s, etc.

. Employee Stock Ownership Plans (ESOPs)

. Contractual rights under deferred compensation plans

. Employment contracts

Making changes to your will or your trust will not automatically make changes to all your assets listed in those documents.

Beneficiary designations usually become effective immediately after death. As they override any directives provided for in your will, the assets will not have to go through probate. Probate can be a time-consuming, public and sometimes expensive process.

It is important that your beneficiary designations are updated and coordinated with your overall estate planning documents. Be sure to update your beneficiary information after any major life event such as a marriage, divorce or the birth of a child.

It's also important to name primary and contingent beneficiaries. The primary beneficiaries will inherit the funds first. If they are dead, or if you die together, your assets would instead go to any secondary beneficiaries, which are sometimes referred to as contingent beneficiaries.

As you are making beneficiary designations, consider to whom you are leaving the assets. Is the beneficiary capable of managing the funds without any structural protections? Is the beneficiary a minor? Does the beneficiary have special needs? Is the beneficiary going to need protection from predators, creditors or ex-spouses? If there is a need to protect love ones, take the time and pay the money to discuss the issues with a qualified estate planning attorney.

Here's an example in which the absence of a trust creates an ambiguous situation with potentially unintended consequences. Sometimes a parent with several adult children will name one child as the sole beneficiary of a life insurance policy. The intent is for this child to pay the parent's final expenses and distribute the balance equally to the siblings. Keep in mind the sole beneficiary doesn't have to use the money for the purpose it was intended. If the child does carry out the parent's wishes, this could result in other consequences. The child may be making gifts to his brothers or sisters or the money could be subject to claims from the one child's creditors or a divorce, for example.

When changing these documents, confirm with the receiving institution that the changes were actually made and reflect your wishes. Keep copies of your beneficiary documentation. It might be years before they are needed and the custodian might not be able to locate the paperwork.

Beneficiary designations help ensure assets transfer to the intended parties and help protect loved ones. If you have any further questions, please contact a qualified estate planning attorney.

Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at mhebert@harborgroup.com. Your question and his response might appear in a future column.


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