As many people already know, a Will is a document that allows someone to specify who they would like their assets to go to after they die. However, a lot of people do not realize that your Will only applies to your probate assets. Probate assets are things which pass according to your will, whereas non-probate assets pass according to your beneficiary designation. Some common types of non-probate assets include life insurance and retirement accounts. These days, many people hold the majority of their wealth in their retirement accounts (e.g., 401(k)s, 403(b)s or IRAs). As a result, it is vital that you make sure your beneficiary designations are up to date and accurately reflect your wishes.
Consider the following example. Mr. Smith is recently divorced from his second wife. Mr. Smith changed his Will after the divorce to leave his entire estate to his daughter from his first marriage. Mr. Smith, recently retired, has $3 million in assets – $2.5 million of which are in his IRAs, while his home and a small checking account make up the other $500,000.00. Mr. Smith dies unexpectedly, and his daughter moves forward to probate his Will. His daughter is shocked to find out that her father’s Will does not apply to his IRAs. She is even more shocked to find that her father never updated his beneficiary designations after his divorce; as a result, Mr. Smith’s daughter will only receive her father’s probate assets – the home and the small bank account. Meanwhile, the former Mrs. Smith, who was still named as Mr. Smith’s beneficiary on all of his IRAs, will walk away with $2.5 million from her ex-husband’s estate.
As this example illustrates, it is extremely important to update your beneficiary designations when changes happen in your life, such as marriage, divorce, the birth of a child, or a death in the family. It is also important to name contingent beneficiaries. A contingent beneficiary is someone who would receive the asset if something were to happen to your primary beneficiary. This will help to protect your wishes even if unforeseen circumstances arise.
Additional planning might be necessary depending on who you would like to name as your beneficiary. Naming a minor child as your beneficiary will lead to complications, because minors are not legally able to manage their own assets. It would be wise to set up a trust to hold the assets until the child reaches adulthood. Further, a special needs individual who is receiving SSI or Medicaid will lose their benefits if they receive a lump sum of money. It is essential to create a Special Needs Trust, which will specifically protect a special needs beneficiary from losing their benefits.
To ensure your estate plan will work as intended, we recommend that you regularly check your beneficiary designations. If you change your beneficiary designation online, we highly recommend that you double check to make sure your change has been accepted by the company. For some companies, making a change online only begins the process, and you can expect paperwork to come in the mail in the following weeks requiring your signature to officially change your beneficiary. This can be easy to miss in our world of online transactions and daily junk letters in our mailbox, especially when you are not expecting it.
The best way to make sure your beneficiary designations are in line with your estate plan is to meet with an attorney who understands the importance of planning for both your probate and non-probate assets. A review of your beneficiary designations can help identify any legal or tax implications and allow you to address them before it is too late.
The information provided is not intended to be legal or tax advice and does not constitute any attorney/client relationship. You should consult with an attorney for individual advice regarding your own situation.
Ms. Melancon is an attorney with Legacy Estate & Elder Law of Louisiana, LLC with offices in Baton Rouge, New Orleans and Lake Charles, LA. The primary focus of her practice is estate planning, probate, special needs planning, and elder law. For more information or to attend an upcoming estate planning seminar, call her office at (225) 744-0027.
