Most people think their estate planning work is done once they’ve executed a will. This isn’t surprising; a will spells out exactly who gets what when a person dies.
But there’s a potential quirk in the financial world that could undo all the work that people put into their wills. The Wall Street Journal recently ran an intriguing feature story on the number of financial products that allow investors to name beneficiaries directly. For instance, when an investor opens a new retirement account, it may allow the investor to name who gets the funds in the account should the investor pass away.
There is sound reason for naming beneficiaries directly in the asset: it avoids the red tape that can sometimes occur after a person dies. When an investor names a beneficiary directly, there’s no question as to where the dollars in an account are supposed to go once that person passes away.
There is a danger, however, as The Wall Street Journal story points out: The beneficiary decisions that investors make when opening new accounts override whatever beneficiaries are included in the will. Trouble occurs when investors’ wills don’t coordinate with the beneficiaries that they name on their various bank accounts and financial products. If investors carelessly name beneficiaries on their retirement accounts, they may inadvertently exclude a loved one that they have specifically named in their will.
The Wall Street Journal cites one case that shows how devastating this mistake can be. A man wrote a will leaving his entire estate to his longtime girlfriend. Before he died, though, the man realized that he had named relatives, some of whom had already died, as beneficiaries on certificates of deposit with a bank. The man has since died, but his estate is now tied up in a lawsuit.
These mistakes are alarmingly common and understandable. We’re busy people. We make countless decisions every day. It’s not too hard to believe that we would mistakenly jot down the wrong beneficiary name when we open a new savings account or IRA.
That’s why it’s so important for investors to carefully consider the names they are listing as beneficiaries whenever they open a new investment vehicle. A bit of planning at that moment can save a lot of heartache later. And this small bit of planning can ensure that a loved one doesn’t miss out on part of an inheritance because of a careless mistake.
In addition, many benefits of trust and estate planning are lost if assets pass according to a financial account’s records, rather than through a carefully constructed will or trust. For example, and perhaps most importantly, properly constructed trustsavoid probate. Probate is the legal process of administering an estate, resolving all claims and distributing the deceased’s assets. If an asset is in a trust prior to the death of the donor, then it passes immediately to those named in the trust, thus avoiding probate.
Another benefit potentially lost includes the many tax benefits proper estate planning can provide. A thorough discussion of the various types of trusts and estate planning methods to reduce tax is beyond the scope of this article, but an experienced estate planning attorney can provide more information on the tax benefits of certain types of trusts.
In addition to tax benefits, a trust can shelter property from creditors after death, maintain a beneficiary’s government program eligibility and offer privacy for the deceased’s estate.
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