Avoid This Common Mistake: Failure To Update Account Beneficiary Designations

It is a mistake to assume that once your will and/or Revocable trust is signed, your planning is done and there is nothing else you need to do.  You must make sure that you properly title assets and structure beneficiary designations on your life insurance and retirement assets like IRA’s and 401k’s to coordinate with the planning under your wills and Revocable Trusts.

The preparation of a Will or Trust document should not be the final step in making sure that your estate plan is fully established.  Beneficiary designations on assets such as life insurance, IRA’s, 401K’s, annuities and pension/profit sharing plans will take precedence over directions set forth in a Last Will and Testament or Trust Document.  Jointly owned assets will also transfer to the surviving joint asset owner regardless of the beneficiaries designated under other estate planning documents.  It is very important that individuals coordinate their beneficiary designations and ownership titling with the wishes set out under their Will or the Trust(s) created during their lifetime.

The Last Will and Testament only serves to transfer those assets which become a part of a person’s probate estate.  A probate estate is made up of assets that were in a decedent’s own name at the time he or she passed away or those assets that were paid to the estate after the date of death.  Because the beneficiary designation or joint ownership of an asset will cause a transfer outside of the probate estate, these assets will not be distributed in accordance with the Will unless you take the necessary steps to coordinate these two separate facets of the planning process.

The Revocable Living Trust is a document used by clients to help avoid the need for probate transfers at the time of their death.  The Revocable Living Trust will only serve to transfer assets that are titled in the name of the trust prior to death or which have been directed to the trust after their death.  Note: You cannot transfer ownership of IRAs, 401(k)s or Retirement Assets to a revocable trust during your lifetime.

If you have beneficiary trusts established under your Will or Revocable Trust benefitting certain individuals, it is imperative that you consider revising the beneficiary designations on life insurance and potentially Annuity, IRA, 401K and other similar accounts to pay to the trusts and not to the individuals you might want to benefit from the trust(s).  Any trust you designate as a beneficiary of a Retirement Account at your death MUST have special IRS required language to insure the best tax income tax treatment for your beneficiaries.  Common beneficiary trusts you might have under your documents:

  • A trust for your spouse created for potential use of your federal estate tax exemption, creditor, divorce and asset protection, or
  • A trust for young children appointing a Trustee to watch over assets until they reach a certain age at which you believe they can properly handle assets.  At that appointed age you have determined there is no risk that they could lose assets to divorce, creditors or law suits, or
  • A trust created for your children that is intended to help protect their inheritance for their entire lives.  This trust is tailored to provide divorce, creditor and asset protection for your children through adulthood, or
  • A trust created for a special needs beneficiary, or
  • A trust of any other kind for any other reason.

Regardless of who the trust is created for or the purpose of the trust, the beneficiary designations and/or asset titling will have to be modified should you want these assets to pass into the trust(s).  Again, absent the necessary change, the assets will pass outside of the trust provisions and directly to individuals named as beneficiaries.

Just remember, when you sign your Will and/or Revocable Trust, your planning is not done.  You have to take the steps necessary to insure that all of your various accounts and assets are fully integrated with your planning.  Without these changes to your account beneficiary designations, your planning might be rendered incomplete.

Some of the most common planning considerations for our clients are:  Creation of Last Will & Testament, Creation of a Medicaid Asset Protection Trust, use of a Medicaid Compliant Immediate Annuity, qualification of the Family Caregiver Exception, creation of the Caregiver Agreement, Irrevocable Burial Reserve, Monthly Gifting Exception, Elder Law Friendly Financial Power of Attorney, Medical Power of Attorney, Living Will.

Check out our other great articles throughout this site that more specifically address the different ways to protect and preserve your assets.  Click here:  Our other blog articles-check them out!

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For assistance developing a comprehensive estate plan or nursing home asset protection plan in Pennsylvania, please contact Douglas L. Kaune, Esquire at (610) 933-8069 or email him at dkaune@utbf.com. Doug’s entire practice is focused on elder law, Medicaid application, estate planning, trust planning, estate administration and protection of clients’ assets from nursing home spending and estate and inheritance taxation.

Unruh, Turner, Burke & Frees, P.C. is a full service law firm which has three convenient office locations in Phoenixville, West Chester and Paoli, Pennsylvania. The firm primarily services clients in Chester, Montgomery, Delaware, Philadelphia, Bucks and Berks Counties, but can represent clients throughout Pennsylvania.