Beware the Beneficiary Form – It Can Kill Your Estate Plan (Part 1 of a 4-Part Series)

HNW Elder Law, Estate Planning

If you think your estate planning is done once you have signed a will or trust, think again. All your hard work can be undone with a stroke of a pen when you open a bank, brokerage or retirement account. Many investors or individuals have the option of naming beneficiaries to a wide range of financial products.  If a beneficiary designation form is completed when the account owner dies, the account/property goes directly to the beneficiary/beneficiaries named on the accounts.  In such a case, the investment/property interest bypasses the probate process which governs a last will.  The problem:  Because these beneficiary designations override your will or trust, they need to be carefully coordinated with your over-all estate plan.

People don’t realize the importance of beneficiary designations. An unintended or neglected beneficiary designation to a financial account can cause a loved one to be disinherited, a disabled child to lose government benefits, and heirs to be slapped with a big tax bill.  Seeing so many cases like this, I’ve coined a term for it: “bank-teller estate destruction.”

Many people simply don’t remember who they named as a beneficiary of accounts they opened years ago.  Fredrick P. Niemann, a Freehold New Jersey lawyer, tells of one man who wrote a will leaving his entire estate to his long time girlfriend, and on his deathbed recalled that he had certificates of deposit naming relatives, some since deceased, as beneficiaries.  The man tried to change the beneficiary designations before he died, but the case is now mired in a lawsuit.

Advisers tend to recommend reviewing all of your beneficiary designations regularly, at least every few years, but certainly after you experience a life-changing event, such as a marriage, divorce, birth or death of a loved one.  Job-changers and retirees also take note:  Beneficiary designations on retirement plans don’t carry over when you roll over a 401(k) to a new employer’s plan or to an IRA, or when you convert a regular IRA to a Roth IRA.

What kinds of accounts can have beneficiaries?

US savings bonds allow holders to name beneficiaries. Bank accounts and certificates of deposit can be made payable on death (POD) to a named beneficiary.  Same with so called Transfer on Death (TOD) registrations for securities, including stocks, bonds and mutual funds. Life-insurance policies and retirement –plan assets are paid directly to the beneficiaries named on those accounts.

POD and TOD accounts were designed as an alternative to a joint account, which also bypasses probate.  When one owner of a joint account dies, the assets automatically go to the surviving joint owner.  But this is not a particularly safe way to leave funds to anyone because the assets are subject to your co-owner’s whims and creditors.

For more information on beneficiary designation and how they relate to New Jersey probate and estate planning, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.

In our next post we will address who can be listed on a beneficiary designation form.

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Estate Planning Attorney

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