The Function of Beneficiary Designations in an Estate Plan

Naming beneficiaries is a powerful estate planning tool because it takes legal precedence over a will or trust. It is a very common tool for the majority of seniors who are in the high and middle-income groups. Many of these seniors own assets such as qualified retirement plans and insurance policies that are legally controlled by a contract that names a beneficiary to receive the assets when they die.

It is wise to name alternate, or successor, beneficiaries. This protects the assets from the probate process and may have other benefits.

Individuals can make serious mistakes unless they get a professional estate attorney to assist them in naming their beneficiaries and completing the beneficiary designation forms correctly. Consider how the use of Amelia and Joseph’s assets strayed far from their intentions:

Amelia’s will established a testamentary trust to pay for her grandson Eric’s education. Eric lives with his mother, but Amelia named Eric’s father as trustee of the trust. Amelia wanted her life insurance to fund the trust. However, Amelia named Eric as the beneficiary of her life insurance policy. When Amelia died, Eric was 15 years old. The life insurance proceeds did not go the trust. Instead, the court appointed Eric’s mother as conservator to manage Eric’s assets. When Eric turned 16, his mother used the life insurance proceeds to buy Eric a new car, leaving no funding for the testamentary trust that was intended to pay for Eric’s education.

Joseph had a developmentally disabled adult daughter named Sarah. Knowing Sarah would never be independent, Joseph’s revocable living trust described an after-death trust to manage assets for Sarah, with special provisions to avoid jeopardizing the government assistance Sarah receives. Joseph also named Sarah as the beneficiary of his individual retirement account. When Joseph died, a conservator was appointed for Sarah to manage her new assets. Because the conservator was obligated to use the IRA funds for Sarah’s support, Sarah received too much money to qualify for her government-funded training and supervised housing. Sarah’s conservator had to find new training and housing for her.

These examples illustrate the importance of coordinating all the documents in the entire estate plan. These estate plans would have been effective if Amelia and Joe had named the trust as the beneficiary of the life insurance or IRA.

Remember, seniors may have designated their beneficiaries years earlier. Births, deaths, divorce, remarriage, and other events may create the need to change the original beneficiary selections. Remind your clients to regularly review their named beneficiaries and make any necessary updates. It is also important to name successor beneficiaries.

The Inheritor’s Disclaimer

Individuals who inherit an interest in an estate may disclaim part or all of their interest in it. The inheritance then passes to the next in line, according to the terms of the will, trust, or state laws of intestacy. Inheritors may want to use disclaimers if doing so would enable them to reduce their own estate taxes. For example:

Ramon’s will leaves everything to his wife, Deborah. If Deborah does not outlive Ramon, his will then leaves everything to his sister Ingrid. When Ramon dies, Deborah decides to disclaim her interest in Ramon’s property because she already has a sizable taxable estate of her own. As a result, the property goes to Ingrid. Assuming Deborah followed IRS regulations, the property is treated as passing from Ramon to Ingrid, rather than from Deborah. This protects Deborah from suffering estate tax consequences from Ramon’s estate and from incurring gift tax problems of her own.

Note that Deborah cannot direct who receives the property as a result of her disclaimer. If Deborah had tried to direct that her son David receive Ramon’s property in her place, her disclaimer would not have been effective. A disclaimer operates as if the person disclaiming had died. Because Ramon’s will directed that Ingrid receive the property if Deborah died first, Deborah’s disclaimer must result in passing the property to Ingrid.

Usually, a disclaimer must occur within nine months of death-and the person who is disclaiming the property cannot receive any interest from the property. For example:

From her husband, Brenda inherited stock, from which she received dividend payments. In the first month after his death, Brenda deposited the dividend payment into her checking account. In the second month, she spent it to help purchase a new car. Because Brenda received the dividend and deposited into her account, the stock that her husband left her was no longer eligible for the tax benefits of a disclaimer.

Joint Tenancy with Rights of Survivorship

If the decedent owned property as joint tenants with rights of survivorship, the survivor (or survivors) who also owns the property automatically inherits it. Individuals do not have to married couples to won property jointly with rights of survivorship. Submitting proof of death will place the title in the name of the survivor. For example:

In her will, Mary named all five of her children to receive all her property equally. Mary also named Robert, her middle child, to manage the estate. All of Mary’s property was in the form of checking, savings, and investment accounts. For all these accounts, Mary named Robert as a joint tenant with rights of survivorship. When Mary died, Robert inherited all the assets, and Mary’s other four children received nothing.

There can be other problems with joint tenancy with rights of survivorship. In this example,c reditors of Robert’s might be able to garnish Mary’s accounts if they can show that a completed gift was made to Robert. This could also create a gift tax liability for Mary. If Robert had died before Mary, half of the joint accounts may have been included in Robert’s estate, subjecting his estate to potential estate taxes.


The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved.