New York Estate Planning & Elder Law Blog
Most lists of “common estate planning mistakes” include the frequent error of failure to properly update beneficiary designations. Yet, even that mistake is deceiving, because updating is just one thing to consider with these designations. Even if the names are evaluated on a consistent basis, it is still important to ensure that the person named as the beneficiary fits in with other aspects of an overall estate plan.
Fox Business recently published a story listing ten different ways that life insurance beneficiary designation decisions are made in error. The story is worth browsing to get a feel for some common issues.
For example, it is critical to name someone who can actually receive the funds. Parents may name their minor child as the beneficiary, but the insurance company will not dispense funds directly to a child. Without a trust or similar arrangements, then this designation will cause problems. A guardian must be appointed, leading to costly and timely court proceedings being necessary.
Similarly, if proceeds may go to a relative with special needs, careful consideration must be given to how the benefit will affect government support. While it may seem counter-intuitive, giving money to a child with special needs may cause more harm than good, disqualifying them from support, like Supplemental Security Income. This is a textbook example of why the designation needs to be considered only in light of an entire estate plan.
Besides the effect on government program eligibility, taxes must also be weighed when making designation decisions. Life insurance is usually tax-free, but not always. For example, if the policy owner, insured party, and beneficiary are three different people, then gift taxes may be implicated. This occurs when a parent takes out a policy on another parent with the child named as beneficiary,.
Another common error is failing to be specific. For example, it is one thing to say that you want the policy to pay out to your children. But what happens if one child is not around, should their share go to their own children (grandkids) or be added to the surviving children’s share? Also, who would count as a child? Are step-children included? Failing to be as specific as possible in these matters often results in confusion and legal challenges down the road.
Simply updating a designation and naming anyone is not the best way to handle these matters. Be sure that the designation does not cause more issues than it solves by fully integrating it with your other legal estate planning documents. A professional can provide tailored advice on these decisions.