Name the Right Life Insurance Policy Beneficiary

How Not to Name a Life Insurance Beneficiary

In estate planning, there are right ways and wrong ways to designate beneficiaries for your life insurance.  Here are some common mistakes people make:

♦ Assuming a Will or Trust controls the beneficiary designation.

      This point cannot be hammered home often enough. Neither your Will nor your Trust will control or “trump” a beneficiary designation made with the insurance company. If you make a designation on the insurance company form, that is the one that will control what happens to the insurance money. All insurance companies require you to complete a beneficiary designation when you sign up for the policy, so you most likely do have a designation — whether you remember it or not!
      The only way your Will is going to decide who gets the policy is if you either have no designation made (again, that is highly unlikely), or the person you designated is already deceased and you did not designate a contingent beneficiary. Only then will the policy pay out to your estate and be governed by the probate of your Will. Your Trust will not decide things unless the policy pays to your estate and your Will leaves it to your Trust, or the Trust is the designated beneficiary with the insurance company.

♦ Failing to name a contingent beneficiary.

      A contingent beneficiary, sometimes called a secondary beneficiary, names the person or persons you want to get the policy if your first choice dies before you do. This is like naming a backup. Many people fail to do this. It usually happens because, when they bought the policy, they wanted to “think about it” and the insurance company only required that they name the primary beneficiary.
      A lot of folks fail to go back and designate the contingent beneficiary. When the primary beneficiary fails to outlive the insured, who then dies without having named a backup, the policy pays out to the insured’s estate. This usually means that a probate will be required, which can be a very expensive and time consuming process. If you also failed to make a Will, the state will decide who gets your insurance money!

♦ Never updating the beneficiary designation.

      Has it been a long time since you bought the policy and setup the initial beneficiary form? If so, it’s probably time to review that designation and see if changes are in order. People you had named may have passed away, children may have grown, circumstances may have changed. Don’t rely upon your memory either — many people are surprised to see who the designated beneficiaries are when they order a copy of the beneficiary form from the insurance company.

♦ Naming a minor child as beneficiary.

      This can be a recipe for disaster. The insurance company will not pay out to a minor. A court proceeding will probably be necessary and, depending upon the size of the policy, the court may require that it be held in a special court-supervised account until the minor reaches age 18. At that time, the court will distribute the funds to the young person. At age 18. Is that really what you want?

♦ Naming a person with special needs as a direct beneficiary.

      If you have a loved one receiving needs-based government assistance (SSI, Medi-Cal, etc.), then you probably already know how careful you need to be to ensure that you don’t accidentally cause ineligibility.
      Naming the recipient as a life insurance beneficiary is a sure way to cause a problem with non-exempt income and countable resources. If nothing is done, the person will probably lose all government benefits until the life insurance money is spent, and then may have to re-qualify for benefits (which may or may not be awarded again!)
      To prevent this, a court proceeding will be necessary to setup a special trust to hold the money and use it for permitted purposes during the recipient’s lifetime. This is time consuming and expensive, during which the recipient’s benefits are still threatened. Moreover, anything left when the recipient dies will go to the government, not to other family members.
      An estate planning lawyer can help you setup a special trust that can be the direct beneficiary of the policy, use proceeds for the recipient, yet still pass the remainder on to your family when the recipient dies.
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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 1 – Waiting Too Long

Procrastination 1
Procrastination is the number one mistake people make in estate planning. Everyone knows that death is certain to occur but uncertain as to timing. Despite this, numerous surveys suggest that more than half of adults in the U.S. fail to make a formal estate plan. I say “formal” because even having “no plan” is having a plan — the State’s plan! If you die without a Will or Trust, the State will decide for you. Is that what you really want?

Even armed with knowledge, people still delay. Few things are more unsettling than contemplating one’s own mortality. Thinking about the possibility of incapacity, such as dementia or Alzheimer Disease, is equally difficult. But delay will be your undoing. “Coulda – Shoulda – Woulda.” Don’t let this happen to you.

It may surprise you to know that most people find that the actual planning process was not as bad as they imagined and experience a great sense of relief and security once a plan is in place. This can be especially true if you have a good estate planning attorney willing to take the time to really educate you about what it is that’s being done and why. Don’t settle for a “just sign here” approach. Some estate planning concepts are a lot to take in, but you should understand what you’re doing. Even if you later forget the explanation, at least have the assurance that you understood it when you signed it and it reflected the result you wanted.

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 2 – Too Much Reliance on Self Help

A frequent mistake people make is relying too much upon self help. Most self-made plans or informal arrangements sound good on the front end, but turn out bad in the long run.

For example: Don’t put property into joint names with your adult child so that it automatically passes to the child when you die. People think this is a quick and easy way to pass property and “save” money on attorney fees, but this idea has many pitfalls. If the child dies before you, you’re back to square one. Perhaps not a problem if you have time to fix that, but what if you’re in an accident together and you never get a chance to change things? Or what if you just never get around to it? Now your heirs will have to probate your assets, which will cost them far more than it would have cost for you to hire a lawyer for estate planning.

Creditors are also a consideration. Did you know that your child’s creditors could use your property to collect on the child’s debts? If your child is on title, the child is an owner. Creditors can lien real estate for collection of a judgment. They can garnish bank accounts. When that happens, it’s up to you to try to undo it. Proving something is really all yours, recovering funds, releasing a frozen bank account, or removing a lien can be very difficult and does not always work. It usually requires help from a lawyer – costing more than you would have spent on an estate planning attorney.

Another example? Don’t leave everything to one adult child because that child “knows what you want to do with it” and will just divvy things up when you die. This plan takes many forms, including joint title, naming just the one child in a self-made Will, or simply telling that child what you want without discussing it with anyone else or taking any formal steps. What could possibly go wrong? Plenty! For one thing, as with the prior example, the child could die before you or at the same time as you. You’re also putting your child in a difficult position if there is any dissension at all between your children. You may not think that your little darlings would behave that way, but money and grief do strange things to people – tempers flare, siblings don’t get along, and sometimes the child who was supposed to divide the property decides to keep everything instead. Stories of feuding among children abound, ultimately costing expensive legal fees and leaving behind broken relationships. Even if you’re certain this won’t happen to you (famous last words), consider the other extreme: Will your child feel so guilt-ridden or self-effacing that your child gives everything to the siblings and keeps nothing?

Don’t assume your spouse or partner can just get everything then setup a plan for the joint assets after you die. The chance of a common accident or illness is too high. Think of how often you and your significant other engage in joint activities. Not just higher risk things, like rock climbing, skydiving, or scuba, but everyday activities, like riding in a car, attending a theme park, taking a plane or having a boat trip. How about natural disasters? There may not be time or ability to plan if both of you are involved in a calamity. What if you don’t die, but you become incapacitated instead? Now you have two troubles: no planning for incapacity and no planning for inheritances. You also can’t assume your significant other will inherit everything from you, even if he or she survives you. Most states have laws that restrict or limit the inheritance given to same-sex couples or when the deceased also had children (even adult children).

More good advice: Don’t try to write your own Will or Trust. This is a recipe for disaster! If you fail to follow required formalities, the document will be invalid. If there is anything ambiguous in what you wrote, a court will decide what you meant. That is expensive and like rolling a dice. If you think it’s easy to be clear, think again. Take the case of the man whose Will directed that his daughter receive a large monetary gift if she survived him by 30 days, and that his second wife receive everything else. Daughter died on day 28. Who gets her share? The Will said wife gets everything “else.” The Will did not say what to do if daughter did not survive. Does the second wife get it or does it go to the man’s children from his prior marriage? Where do you think those children think it should go? A court will probably have to get involved and this is going to cost a whole lot more than having a lawyer write the Will!

You shouldn’t try to be your own lawyer any more than you would try to be your own dentist or surgeon. As the saying goes, “You get what you pay for.” If you think do-it-yourself estate planning software or online service is the answer, you should read the evaluation conducted by Consumer Reports.

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 3 – Inadequate Planning for Adult and Minor Children

Many people mistakenly think that planning for children only applies to minors. Not so! While minor children certainly present unique planning issues, it is just as important to think through the needs of your adult children as well. Some of the more important considerations are:

Guardian for Minor Children:

•  Do you really want to name a married couple?  If they later divorce, both will technically still be entitled to remain guardian.  Is that really what you intended, or would it be better not to name the spouse?  Even if not named, a spouse can be given authority by the guardian and can help raise the children.  But the guardian remains the boss, not the spouse.  Delegated authority ends whenever the guardian says it ends.

•  Did you know that you can name one person to be in charge of raising your children and a different person to be in charge of their inheritance?  Most parents do not know this and struggle to decide upon someone that might be a good choice for both jobs.  That’s often difficult to do because most people are better suited to one task or the other.

Encouraging Values and Behavior:

•  Most folks know that they can setup an inheritance to pay for college.  But did you know that you can specify what degrees would be acceptable, what minimum grades Graduate 6the student must attain to keep receiving assistance, and even what types of education can be supported.  College only?  Dance lessons?  Golf?  Travel abroad?  You can be as specific or as general as you care to be.

•  An inheritance can also be structured to encourage certain behaviors or achievements.  If you were still here, would you encourage college?  Then how about providing for a nice monetary gift or new car as a gift when the person attains that first degree?  It’s like a carrot, hanging out there and encouraging progress.  You can use your estate plan to encourage development of charitable giving, attaining certain skills, starting a business, or experiencing things that you consider to be important or worthwhile.

•  Planning for fiscal responsibility is an area often overlooked.  Without proper planning, a minor child will receive the inheritance outright — no strings attached — the moment he or she turns 18.  Imagine all the things that could wrong with that!  A structured estate plan can avoid this and instead, for example, provide for the inheritance to remain in trust and be given out to the young person in increments over time.  This provides the heir with an opportunity to learn to manage money, while retaining the bulk of the inheritance securely during the learning process.

Addressing Special Needs or Circumstances:

•  An unplanned inheritance can be disastrous for anyone receiving government benefits for a needs based disability, such as SSI or medicaid (Medi-Cal in California).  Receiving an inheritance outright can result in a total cancellation of benefits!  With proper planning, this can be avoided and a trust fund can be established to provide for things not covered by government benefits.

•  Have a loved one with a substance abuse problem or other challenge?  An unfettered inheritance may be squandered or even used to carry on life threatening activities.  Adequate planning can address this situation and allow others to control the inheritance,  provide for rehabilitation services, medical care, and necessaries of life until the heir’s situation has improved.

When it comes to your children, your estate planning should not stop when they are no longer minors.  A bit of considered thought can open the door to all manner of planning possibilities.

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 4 – Failure to Avoid Probate

California probate is well worth avoiding! Unlike many states, where probate of a will is a fairly quick and easy process, California probate is expensive, time consuming and very public.

California probate is very expensive. The probate court filing fees and court appraiser fees are usually about $2,000 minimum. Attorneys fees and executor fees are set by law according to a formula and the value of the estate. The value used for calculating fees is the gross value, not the net value after deducting liens or expenses. On an estate valued at $1 million, attorney and executor fees are $48,000, split evenly between the attorney and the executor. Fees and expenses can be even higher if contested litigation is involved, such as creditor disputes or lawsuits to recover property.

Throw Money AwayThose expenses can be avoided if you have a trust. Most trusts cost only a few thousand dollars to create. Contrast that with $50,000 for the probate process! And that’s just for a $1 million estate. The expenses are higher as the estate value increases. Even average people can easily exceed a million dollars with the value of their home, cars, a few bank accounts, and life insurance payable to their estate.

California probate is time consuming and very public. If you die without a trust, unless your estate is very small, it will have to pass through the probate court. Court 1 In California, it takes a minimum of about 6 months to finish a probate, and usually closer to a year (sometimes several years!) Your heirs have to wait for their inheritance. Meanwhile, the executor (usually a loved one) will have to account for every penny, follow required procedures before taking any action, and keep reporting to the court.

California probate is also a very public process. The papers that must be filed with the court — and which become public documents available for all to see — include your last known address, the names and addresses of all of your loved ones, an itemization of your property and the value of each item, and disclosure of “who gets what” from you. If you think no one bothers to look at public court filings, think again! There are all manner of predators out there, trawling the court filings in search of heirs to scam, property to “case out” for potential theft, or folks to pursue with unwanted solicitations.

With proper planning, especially the use of a trust, all of these situations can be avoided.

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 5 – Failure to Follow the Estate Plan

Plan 2Don’t go through the time and expense of making an estate plan, then fail to follow it!  It is an estate plan and, as they say, the best laid plans are only as good as their execution.  Failure to follow the estate plan will almost always result in significant and unintended consequences when a death occurs.

The two easiest ways you can mess up your estate plan are 1) not keeping your assets properly titled to your trust, and 2) failing to coordinate your beneficiary designations (which was discussed in post #6 of this series).

Failing to properly title assets can occur in a variety of ways.  You may have forgotten you owned a particular asset.  You may have procrastinated in changing accounts over to the trust, then something happened (and it was too late!) or the task got lost in the shuffle.  You may have purchased additional property and failed to title it to your trust.  You may have put one of your children on an account with you, or promised someone something that is not set forth in your plan.

Failure to follow your estate plan can result in needless probate proceedings, cost money you didn’t have to spend, and change the ultimate disposition of your assets.  It may also necessitate court intervention if you become incapacitated.

Luckily, following the plan is usually not terribly difficult if you just remember two golden rules:  1) Include all intended gifts / bequests in your estate plan – do not make side deals, promises, joint accounts or take any other steps that were not planned out; and 2) Pay particular attention when you are buying or changing assets — this is where most mistakes are made.

For example, if you have a trust and your house is titled to the trust (as it should be), but then you refinance the house, watch out!  Most lenders will not make loans while the house is in trust.  Instead, into that enormous pile of documents you sign at close of escrow, the lender includes a deed transferring title to your house out of your trust.

The pile also includes a “deed of trust,” which some folks think means a deed putting the house back into the trust, but that is not the case.  A “deed of trust” is the document that creates a lien against your property to secure the loan.  It does not change title.  The only way to get the house back into your trust is to sign another deed.  The lender won’t tell you that and the deed will not be included among the escrow documents.

If you die before the house is put back in your trust, a probate may be required.  If you become incapacitated and you do not have a power of attorney for finances, a court proceeding may be necessary to sell the property or get it transferred back to your trust.  The same result may occur if you sell the property, then deposit the proceeds to an account outside of your trust.

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 6 – Failure to Coordinate with Beneficiary Designations

Beneficiary 1People wrongly think that their Will overrides beneficiary forms.   This is categorically untrue!   An asset carrying a beneficiary designation will not be controlled by your Will (unless the beneficiary is your estate).  This includes life insurance, bank accounts, brokerage and investment funds, annuities, IRAs and 401ks — any asset for which you have named a beneficiary.  It also includes property owned jointly between you and another person unless it is titled in certain ways.

Suppose, for example, that you have $300,000 in property that will pass under your Will.  Your Will says everything should be divided equally among your three children.   But you also have a life insurance policy for $150,000 that names only one of your children as beneficiary.  That one child will inherit all of the life insurance money ($150,000) and one third ($100,000) of the assets passing under your Will.   So instead of each of your children receiving $150,000, one of them receives $250,000 and the other two each only receive $100,000.  Your intention to treat them all equally has been defeated by the beneficiary designation on the life policy.

The same result would occur even if your Will had specifically said that the life insurance policy should be shared equally.  This is because a beneficiary form designation always out ranks your Will.

When making your estate plan or revising your Will, it is crucial to coordinate with beneficiary designations in order to avoid unintended results.  Just how they should be coordinated can depend upon a number of factors.  Your estate planning attorney should be consulted to assist you.

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 7 – Failure to Plan for Incapacity

Conservatee 1Planning for Incapacity is easily overlooked for two reasons: (1) most people associate estate planning with death; and (2) thinking about one’s own mortality is discomforting enough — thinking about the possibility of Alzheimer disease, dementia, coma or other mentally disabling condition is not something most even want to consider.

Planning for incapacity is just as important as planning for death. A great number of people have known relatives or friends suffering from one of these conditions. If you become incapacitated, who will pay your bills? Who will arrange for your care? Who will be the decisionmaker if your relatives can’t agree? Who will have authority to access and manage your assets? Who will carry out your wishes — and how will they know what your wishes are?

If you become incapacitated and have not made sufficient plans, a court proceeding may be necessary and the court will decide who will be in charge of you and your affairs. (In California, this is called a “conservatorship.”)

There are many things you can do to plan for incapacity. The most common are utilizing a trust, a power of attorney for finances, and a living will (also called an advance healthcare directive or a power of attorney for healthcare). You might also consider purchasing longterm care insurance.

Some prefer to purchase a residence at a residential and progressive care facilty.  You start out in a condo or other private residence on the facility property, much like residing in a country club (usually without the golf course).  The facility property often includes a dining room, community facilities and activities, and possibly other amenities, such as a chapel, pool, spa, tennis courts or exercise room.  If you decline as you age, you can relocate from the private residence to an assisted living facility, enabling you to maintain as much independence as possible while still living on facility property.  Should you decline further, the facility includes a skilled nursing home.  This arrangement also enables a well spouse to remain on site, residing in an appropriate environment while easily visiting with the less able spouse.

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Catch Me on the Radio!

I was the guest on the Ron Siegel Home and Finance radio show on Wednesday, June 19th [Money Radio 1200 AM (Desert), AM 1510 (Inland Empire / Orange County) and AM 1450 (North San Diego)].

You can catch the archive at: Ron Siegel Radio

Ron’s a great guy! What an experience!

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Top 10 Mistakes People Make in Estate Planning, Wills and Trusts: # 8 – Failure to Plan for Taxes

IRS 2There are several types of tax that may apply when a person dies. Failure to plan for these may result in higher taxes, imposition of penalties or interest, and lost opportunities. Some of these taxes are:

Federal & State Income Taxes. Death does not absolve the obligation to pay income taxes. The decedent’s final federal income tax return (and state, if applicable) must be completed and any taxed owing must be paid. (Of course, it’s also possible that a refund will be due!) The person responsible for filing this return is the executor named in the Will, but if there was no probate proceeding then the person named in the Will, the trustee, or someone inheriting property from the decedent can file the return. If the final tax return is not filed, or if taxes are due, the person responsible for filing may be personally liable and the heirs will have to pay the taxes from the inheritance they received.

Federal Estate Tax. The estate tax is essentially a tax on the privilege of giving your property away at your death. As of January 2013, the amount exempt from tax is $5 million, with an annual inflation adjustment. If the value of your “taxable estate” is less than the exemption amount, no tax is owed. If it’s higher, the maximum tax rate is 40%. (This is all good news! The exemption amount used to be as low as $675,000 and the maximum rate was once 55%!) These amounts are subject to the whims of Congress — changes in the estate law laws are revisited with every administration.

The “taxable estate” means any property owned at the time of death, any life insurance owned by the decedent, certain property over which the decedent had too much control (such as the ability to assign an estate to his estate) and any gifts given within three years of death. The exemption amount may be reduced by the making of lifetime gifts in excess of the annual gift exclusion (currently about $14,000 per person per year).

If you think you will have a taxable estate, there are planning methods available to help reduce those taxes. These include leaving assets to a spouse (which are deductible), charitable giving, gifting of appreciating assets during life, purchasing life insurance to cover the estate tax, and other options. If the proper steps are taken, it may also be possible for the surviving spouse to carry any unused portion of the deceased spouse’s exemption over to the surviving spouse’s estate when the second spouse dies. This could result in a higher total exemption on the death of the second spouse.

Inheritance Tax and State Death Taxes. California does not currently (January 2013) impose an inheritance tax or a state death tax. But some states do impose one or both taxes. If the heir lives in such a state, or if the decedent owned real property in such a state, then these additional taxes may be due.

Other Taxes. Generation Skipping Transfer (“GST”) tax, real estate taxes, and gift taxes may all be triggered as well. The GST is a federal tax similar to the estate tax, but applies when a person is giving assets to someone more than one generation younger. At present, GST has an exemption amount equal to the estate tax exemption. If gifts in excess of the annual gift exclusion were given during the decedent’s lifetime, and a federal gift tax return was not filed, it must be completed now and the gift taxes paid, together with possible penalties and interest. In California, transfer of real property — even by inheritance — can result in higher property taxes, unless an exemption applies and is timely claimed. This may be true in other states as well.

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