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Watch Your Beneficiary Designations!

by Laurie Israel, Esq.

You may have drafted your last will and testament, and perhaps other documents such as health care proxies and powers of attorney. You may think you are done with your estate plan. You are not done – you have only done half the work needed.

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There are many types of assets that do not go through your last will. Only property in your own name will go through your will. (See exception to this rule below.) So if you only have a last will and testament, you will miss out on controlling what happens to your other assets that do not pass through your last will.

For instance, your house may be jointly owned with your spouse, in a tenancy by the entirety (a particular joint tenancy applicable to spouses), or with another person in a joint tenancy. Both these forms of ownership include a survivorship provision by operation of law. This means, when you die, the property automatically goes to the survivor. You don’t need a will to pass this property, but after you die, the survivor will have the property in his/her own name. The survivor’s last will determines where the property goes next, and the probate process sets the new ownership in place. In many cases, you may wish to coordinate with the other joint tenant who gets the ultimate distribution of the property.

Tenant in common property is a type of joint ownership that does not have the survivorship feature. (This is the exception referred to above.) Therefore, each owner’s interest in the property passes through his/her will. Whereas joint tenancy always presumes a 50/50 ownership, a tenancy in common can specify non-equal ownerships (in the deed to the owners).

Bank accounts, securities accounts, and certificates of deposits can also be joint. You will want to keep track of these and update them as needed. Owning property jointly does not affect the estate tax treatment of the property. For spouses, the property is deemed to be half owned by each for estate tax purposes. For non-spouse joint owners, the person whose money it was originally will need to include it in his/her estate tax base.

Many people set up joint accounts with loved ones to provide liquidity at the time of death. This engenders many bitter disputes among heirs – was the property intended to be part of the decedent’s estate, or was it a gift to the joint owner? These joint accounts intended to provide liquidity at death are called “convenience accounts.” It would help if the creator of the account writes an affidavit in setting up the joint account that it was for convenience only, and maybe a statement from the joint owner that he/she understands and accepts this arrangement.

If you have already created a joint “convenience account” and wish to get it back into your sole name, you will need to complete a change of ownership form with the bank or securities company. This will require the joint owner’s signature, because the joint owner is giving up something.

Life insurance policies generally have beneficiaries, but this not an automatic process. You must affirmatively name the beneficiaries in a written form issued by the insurer. It is a very good thing to name a contingent or alternate beneficiary also, in case your primary beneficiary predeceases you. If you name no beneficiary, the life insurance will be paid to your “estate,” to be divided as you have set forth in your last will. This is not really a problem, because life insurance is not taxable to the recipient, whether an individual or your estate. It does pose problems in liquidity, because your estate will have to be probated in order to release the funds. This generally takes about 2 months. (Beneficiaries generally can receive the life insurance proceeds in a few weeks.)

It is very important to name beneficiaries for retirement assets, such as 401(k)s and IRAs. Having retirement assets paid to your estate has negative income tax ramifications. This is because retirement benefits are generally income taxed when and as received, and paying them to your estate accelerates recognition of income. Having retirement assets paid to individual beneficiaries has the benefit of permitting (but not requiring) an extended payout (and resulting income tax deferral). A surviving spouse gets a more extended payout than non-spouse beneficiaries. But either way, the retirement asset can build up tax-free until payments are released to beneficiaries.

It is very important to send your signed beneficiary forms into the life insurance company or the retirement plan administrator. If you do not send them, and they are in your file or on your desk, your beneficiaries will not get the assets if you died. You need to affirmatively make sure the signed original beneficiary designation is received and processed by the company prior to your death. Send it by an overnight tracking delivery service such Federal Express with a cover letter. Copy the cover letter and beneficiary form for your records. And most importantly, make sure you get a written confirmation of your beneficiary designation from the company, and make sure it is correct. Mistakes are made all the time. If not correct, send another beneficiary designation correcting the error. Follow up carefully. Some mistakes can cause beneficiaries to have to file a lawsuit to get their money.

The other type of non-probate asset frequently seen is the “paid on death” or “POD” accounts and “in trust for” or “ITF” accounts. Brokers of securities accounts, banks, and other types of investment vendors offer these like candy, often without discussing the implications with the clients . These arrangements essentially convert a probate asset (i.e., one in your own name) to a non-probate asset, which passes to the person named on death. It’s a “stealth” beneficiary form. But the problem with POD and ITF accounts is that people forget they have made the account go by beneficiary, or they have wanted the account to be in essence a “convenience account” to provide liquidity upon their death. Many people are unaware that an account they have is a POD or ITF account and assumes it will go through their last will, to be divided among their heirs as the will says.

I generally advise people to review their accounts carefully and change POD or ITF accounts back into their own name. They can do this without the assent of the beneficiary, but it may require some paperwork. You will have more control over where your assets go if you have them go through your last will, and will be able to better coordinate amounts to go to difference beneficiaries.

So your estate plan doesn’t only include the last will and testament you have so carefully thought out. It also includes defining and putting into effect your beneficiary designations so that they coordinate with your estate plan. Many times in checking the beneficiary designations of my estate planning clients, I have found accounts still going to former spouses, or people no longer connected with my client.

Good estate planning involves a review of your documents and equally important, a review and updating of your beneficiary designations. After the initial work, review your estate plan and beneficiary designations every few years to make sure they have the same vitality they did when you put them into effect.

Copyright ©2010 Laurie Israel.


Laurie Israel is founder of Israel, Van Kooy & Days, LLC, a law firm located in Brookline, Massachusetts. She combines a family law practice with estate planning, tax, mediation and collaborative law. Laurie is currently on the board of directors of the Massachusetts Council on Family Mediation and the Massachusetts Collaborative Law Council. Her writings include articles on mediation to stay married (marital mediation), collaborative practice, marriage, divorce, and pre- and post-nuptial agreements. She is a frequent presenter at professional conferences.

Her websites are: www.ivkdlaw.com, www.yourfamilymatterslawblog.com and www.MediationToStayMarried.com.