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Legal-Ease: An Attorney’s Perspective: Updating Beneficiary Designations

By June 26, 2020 July 1st, 2020 No Comments

Judd Matsunaga, Esq.

True story. Many years ago, we set up a trust for an elderly Japanese couple. As normal, my office “funded” the home into the trust to avoid probate. The couple was also given a Trust Certificate to transfer their bank accounts into the trust — so far, so good. The problem was the life insurance policy.

As with most married couples, the husband named his wife as the beneficiary of his life insurance policy. However, the unthinkable happened, as the wife died first. The husband, up in years by that time, never updated the “beneficiary” on his life insurance policy. So, upon his death, PROBATE occurred — even though they had a living trust.

Lesson learned: ALWAYS make sure you have a “contingent” or “alternate” beneficiary named on your life insurance policy. The same goes with any of your financial accounts with beneficiaries. They include IRAs, company-sponsored retirement plans, annuities, as well as “pay on death” (POD) and “transfer on death” (TOD) bank accounts.

Sometimes, these “beneficiary” accounts will make up much — if not most — of your estate. Occasionally, a client will come into my office and say, “All of my financial accounts have beneficiary designations, do I still need a trust?” I would respond, “Do you own your home?” They would answer, “Yes.” “Then you need a trust,” I would say.

When you designate a beneficiary, those assets will pass to the named beneficiary upon your death, without the need for probate. It’s very important to review and update the beneficiary designations on all of your accounts on a regular basis and whenever you have a major change in your personal circumstances such as a divorce, marriage, adoption, the death of a spouse or birth of a child.

If you were married when you opened these accounts, you probably named your spouse as your beneficiary. If you were unmarried at the time, you might have named a parent or sibling. Since then, years may have passed without further thought about whether your initial beneficiary designations are still appropriate.

Unless you change the beneficiaries named on your accounts, your assets could pass in a manner that is inconsistent with your wishes (such as to an ex-spouse) and/or be subject to a potentially lengthy probate proceeding. Designating a current beneficiary typically avoids the need for the assets to pass through the probate process.

When reviewing the primary beneficiary(ies) of your accounts, make sure you have also named a contingent beneficiary(ies). Contingent beneficiaries are the individuals (or charities) who will receive your assets if your primary beneficiary(ies) predeceased you. For example, if your spouse is your primary beneficiary, you can name your child(ren) as your contingent beneficiaries.

“But Judd, my children are still minors, what can I do?” My suggestion is to name your trust as the secondary or contingent beneficiary in order to eliminate probate if the primary beneficiary does not survive you. This eliminates the need to change beneficiary designations at a later time if the named primary beneficiary dies. The trust never dies, so a beneficiary change is never needed.

If minors are named as beneficiaries, a major advantage of a trust is that the trust can distribute a gift with terms and conditions, e.g., over time or upon graduation from a four-year college or university. Without a trust, they would “take” at the age of majority, i.e., 18 in California. You might say, “If you give an 18-year-old a million dollars, they might not have it at 21.” I agree.

A professionally written trust should contain Sprinkling Provisions for minors. The trustee has broad, discretionary powers to “sprinkle” the money out to pay for the minor’s college education, or health and general welfare. However, the minor does not take control until a later time that you designate, e.g., 21 years. At that time, the beneficiary is given control of your gift outright.

Another reason to name the trust as a beneficiary is that some families want to distribute their estates based on percentages. For example, 10 percent to 10 friends, family members and charities. The Beneficiary Form the bank gave you doesn’t have enough room to list all 10. No problem — just name the trust the beneficiary.

Finally, some people have added a child’s name on to their bank account “just in case.” The parent still considers the account to be his or hers. Furthermore, the parent intends it to be distributed upon death “equally” between all the children. However, upon the parent’s death, the child on the account immediately becomes the legal and rightful owner of the account.

More often than not, however, the child who has access to the funds doesn’t share it with his or her siblings, i.e., “Mom gave me this account.” This can cause major sibling arguing and resentment. Don’t do it. Instead, name the trust as the beneficiary. That way all the children will be guaranteed to share equally without having to fight.

In conclusion, understanding the importance of beneficiary designation on bank accounts is a critical part of estate planning. To ensure that your beneficiary designations meet your specific needs and address any requirements of your state law, you should obtain guidance from an estate planning attorney when deciding upon the appropriate designations.

Judd Matsunaga is the founding attorney of Elder Law Services of California, a law firm that specializes in Medi-Cal Planning, Estate Planning and Probate. He can be contacted at (310) 348-2995 or judd@elderlawcalifornia.com. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen or constitute legal or tax advice and should not be treated as such.