When you decide who will one day receive your assets, you will want to keep some things in mind so that your generosity makes their lives better and does not cause problems for them. Despite your good intentions, failing to take into account certain factors could cause unintended consequences.
Every situation is different, so it can help to talk to a California estate planning attorney about your estate plan. Here are five mistakes to avoid with respect to beneficiary designations:
Not Considering How the Bequest Could Affect the Beneficiary
Giving money or other assets directly to certain individuals could cause more harm than good. For instance, if disabled beneficiaries receive government assistance like Supplemental Security Income (SSI) and Medicaid benefits that provide for their healthcare and other essential goods and services, receiving financial resources could cause them to lose eligibility for those benefits.
A bequest of even a few thousand dollars could disqualify housing, food, medical care, and income programs. Instead of naming such individuals as direct beneficiaries, you could have the money deposited into a special needs trust that would protect their eligibility for benefits programs.
If some of your intended beneficiaries are minors or others who might find a sudden windfall challenging to manage, you could have their future assets put into a trust for them. People who struggle with substance abuse, mental health issues, gambling, and financial stability can do well with a spendthrift trust that distributes money to them for predetermined items, like housing or other basic living expenses.
Naming Your Estate as the Beneficiary on All of Your Assets
While it may seem easier to simply designate your estate as the beneficiary of all of your accounts and other assets, it can be a mistake to do so. Some things, like life insurance proceeds, can get to the beneficiaries much faster if the insurer pays the individuals directly rather than having to go through probate. There may also be tax benefits to naming beneficiaries directly.
Naming Only One Beneficiary and Trusting That Person to Share with the Others
No matter how much you love a close relative, you cannot expect them to share freely with others if you give them everything. Sometimes people will list only one sibling, for example, as the beneficiary of an asset, like a house, with the unwritten assumption that the named beneficiary will sell the asset and split the proceeds with the other siblings. When there is no legal obligation to do that, many beneficiaries will keep everything for themselves and their spouses, if given the option, resulting in unfairness and likely conflict.
Not Updating Your Beneficiary Designations After a Divorce or Death
When one of your beneficiaries dies, you need to update your beneficiary designations and estate planning documents. Otherwise, your heirs may find themselves in a lawsuit to determine what happens to the deceased person’s share.
Also, you will need to review and update your estate plan and beneficiary designations when you divorce. A divorce may invalidate your existing instruments, and you could die intestate (without a valid will or trust) if you do not make new estate planning documents.
The divorce will not necessarily change the beneficiary designations on things like life insurance policies and retirement accounts. Forgetting to change these beneficiaries can mean that your former spouse could get an unexpected windfall one day at the expense of your expected heirs.
Not Adding New Beneficiaries When There Is a Marriage, Birth, or Adoption
Finally, you will want to make sure that you update your estate planning documents and beneficiary designations when you get married or after the birth or adoption of a child or grandchild. Overlooking this step could result in some intended heirs getting “disinherited” by oversight.
A California elder law attorney can review your documents and accounts with you to help you avoid these and other potential beneficiary designation mistakes. Contact us today for more information.