Pitfalls of Estate Planning #4: Beneficiary Designations

Clients will often ask me why they can't just put their kids on as beneficiaries and avoid having a Will or a Trust?

Certainly, each asset and account needs a beneficiary listed, who that beneficiary is though is important. And to answer the question of why it can't be your kids, we need to look at what your overall goal is. Most individuals want their children to inherit their estate in equal shares. Some individuals add charities, and some add grandchildren, or want to plan in the event someone passes away.  This plan cannot always be achieved with beneficiary designations alone.  So in order to decide how we want the beneficiaries to be titled and work together with your Estate Plan, we have to look at the big picture.

Here are some common misconceptions with beneficiary designations:

Many people put one child on as a beneficiary so that child can pay the funeral bill and last cost and expenses and bills that are coming in, before sharing with their siblings.

The problem: If all children don't receive an equal portion, the child who receives it all, is under no legal obligation to share with his/her siblings.

Estate planning documents require that funeral bills and expenses be paid first too, and there is no delay in getting the assets to do so as some people expect.  

Once the money has been given to each beneficiary, the person in charge according to your estate plan may still have bills to pay, and it's difficult to get the money back from others once it has been paid out.

Putting the children equally as beneficiaries on a bank account

The problem: Banks and credit unions are different in nature than other types of assets. Even though you may list 3 people as your beneficiary, only one is necessary to go pull it all out. It becomes a first come, first served type of asset, and again, they may not share with the remainder siblings.

Just listing your children, with no backups

The problem: Unfortunately, there are no guarantees that you will survive your children. While it is an extreme tragedy when it occurs, it does occur all too often. 

Individuals often designate in their Will or Trust that if a child passes away, that child's share is to pass to the grandchildren, great-grandchildren etc. Beneficiary designations can often void that. If you have 3 individuals listed on your bank account, or life insurance policy, or annuity, and one of them is deceased, that share will divide between the remaining beneficiaries. It will NOT pass to the children of the deceased as you may have desired.

Children as beneficiaries, with a Will that includes charities

The problem: Titling always trumps an estate plan. If you use beneficiary designations on all your accounts, but in your Will you wanted 10% to go to a church, charity or organization you were a part of, that gift lapses and is never given. 

The titling on the account, always wins out over the intentions of your Last Will and Testament. So for the gift to take place, you'd have to also list the church/charity/organization as a beneficiary, and as outlined above, you may not be able to designate percentages which can cause additional issues.

Beneficiary designations aren't always a bad thing, and I often have my clients take advantage of the ease with which they can be utilized. HOWEVER, when deciding to just utilize beneficiaries, and not an estate plan, you should really sit down with an attorney and go over all the options, cause and effects, and the ramifications, both good and bad, to your overall goal. An attorney can tell you what plan will best meet your economic, and planning goals.

Our job at Crenshaw Peterson & Associates is to provide our clients with a personalized Estate Plan that is tailored to your life style. Discussing your options, who your beneficiaries are, how responsible the beneficiaries are, how you want them to inherit, and any tax ramifications from different assets, can all impact what is recommended. Having that conversation is crucial to your family's future.

Schedule an appointment today, don't wait until it's too late!