The Importance of Updating Beneficiary Designations
Though it is important to make a plan for distributing your assets that will pass through probate, it is equally important to remember those that will not. Your life insurance policies, retirement plans and investment accounts are an important part of your estate planning. If you do not take them into account and update as life changes occur, even your best estate planning may not achieve what you want.
Life Insurance Beneficiaries
If you have life insurance, you filled out a beneficiary designation form at some point. This form identified who should get the proceeds of your policy. Those beneficiary designations trump whatever is in your estate plan. For this reason, it is important that you review the designations whenever you have a major life change, even if you don't also amend or re-write your will.
For example, most married couples name each other as beneficiary. When they have children, they may amend this to name their spouse as primary beneficiary and their children as contingent beneficiaries. This means if your spouse is not alive when you pass you have ensured your children receive the benefits.
If you get divorced and do not change your beneficiaries, your ex-spouse will still receive your insurance proceeds, not your children. If your spouse passes before you, it will go straight to your children even if they are minors. If your spouse passes before you and you have not named your children as contingent beneficiaries, the proceeds will have to go through probate court and pass according to your will.
For all of these reasons, if you have a major life change you should contact your insurance company to review your beneficiaries and update as necessary.
Retirement and Investment Account Beneficiaries
Most retirement accounts and investment accounts also allow you to designate beneficiaries. The same issues arise here as with life insurance. As the account owner, you can update or change these designations any time you want. But after your death, the funds will distribute according to your last designation, so you want to make sure you have properly updated these to reflect your wishes.
Bank Account Payable on Death Provisions
If you and your spouse are joint account holders, your spouse will automatically receive the proceeds and accounts on your death. If you are unmarried or have accounts only in your name, you should ask your bank whether they have a payable on death or transfer on death form that you can fill out.
If this is available and you fill out the forms, you can designate who receives the proceeds of your account regardless of what your estate planning documents say or how state law would distribute your assets.
Life Changes That Should Prompt You to Review Beneficiary Designations
Marriages, divorces, and the death of a spouse are obvious moments to review your accounts and beneficiary designations.
Other life changes matter also. When your children become adults, you may want them to receive something on your death directly. In that case, you have to change them from contingent beneficiaries to a share of the primary distribution on your life insurance and/or retirement accounts.
How Non Probate Assets Affect Your Estate Planning
When you go to create an estate plan, it is important to discuss all of these non probate assets with your estate planning attorney.
First, the value of these assets counts toward your estate tax liability even though they do not pass through probate. If your attorney does not know about all of these assets, he or she may not have all the information needed to protect your family from taxes.
Second, when you think about your estate and your heirs it is important to consider the whole picture. You may think your spouse is getting their fair share of the entire estate because they are receiving life insurance proceeds. But even if you then leave the rest of your assets to your children or someone else, your spouse can still claim a spousal share of the probate assets. This may mean your estate is divided in a way other than what you intended.
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