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Estate Planning Essentials: July 2017

Chambliss Estate Planning Essentials brings you legal developments and other trends of vital interest in the world of estate planning. This post is brought to you by Cameron Kapperman and other members of the Estate Planning Practice Group of Chambliss Law Firm.


Execute the Game Plan: Making Proper Beneficiary Designations

In her memoir Sum It Up, legendary University of Tennessee Lady Vols basketball coach Pat Summitt emphasized the importance of properly executing all aspects of a game plan. Recounting one of her rare losses at the hands of Stanford University, Coach Summitt recalled that four of her players did their jobs and executed the game plan to perfection. However, one player with one specific role failed to execute her part. This isolated failure caused the entire game plan to break down, resulting in the loss. Even though a plan was in place, failure to execute all parts resulted in a negative outcome.

Your estate plan is just that – a plan. Like a game plan, your estate plan requires proper execution and attention to detail for it to successfully achieve your estate planning goals. 
One commonly overlooked aspect of executing a comprehensive estate plan includes making proper beneficiary designations for assets that would otherwise pass outside of your estate. 
What is a beneficiary designation?
A beneficiary designation is a contractual provision that specifies the person(s) who will receive certain assets when you die. These can also be termed "pay on death" or "transfer on death" designations. You can name almost anyone as a beneficiary, including individuals, trusts, organizations, charities, or your estate. Beneficiary designations are commonly used for:

  • Life insurance policies
  • Retirement accounts
  • IRAs
  • Bank accounts
  • Real estate held jointly

These categories of assets will frequently make up a substantial portion of your estate. However, failure to properly execute beneficiary designations for these assets can lead to a variety of unintended consequences, including adverse tax treatment for your loved ones. 
The following illustrations dealing with life insurance policies demonstrate just a couple of the issues that can arise when beneficiary designations are overlooked or not executed in accordance with your estate plan:

Issue #1: Failing to Keep Beneficiary Designations Current:

 Following his marriage to Susan, Johnny took out a life insurance policy designating Susan as the primary beneficiary. Years later, Johnny and Susan divorced, and Johnny subsequently married his current wife, Amy.
When Johnny died, his estate plan specified that Amy was to receive all of his assets, including the proceeds from his life insurance policy. However, the insurance company pulled the beneficiary designation that Johnny executed when he first took out the policy. Johnny had forgotten about the designation years ago, and Susan was still listed as the primary beneficiary of the policy. Accordingly, the insurance company paid the proceeds out to Susan, leaving Amy out of luck and without recourse.
Execution Pointer: Even when your intent is clear, beneficiary designations can override your estate plan and leave your loved ones in a bind. It is important to review these designations periodically to ensure they are up to date and reflect your current wishes, especially following major life events such as marriage, divorce, or the birth of a child.

Issue #2:  Designating a Special Needs Individual as Beneficiary:

 Johnny and Susan welcomed their first child, Paul. Shortly thereafter, Johnny and Susan each took out life insurance policies designating each other as the primary beneficiary, and Paul as the contingent beneficiary. Paul has a disability that qualifies him to receive governmental benefits that are necessary to his health and welfare. Paul's eligibility for these benefits is based on his income. 
Unfortunately, both Johnny and Susan died in an unexpected car crash. Following their deaths, the life insurance company paid the proceeds of their life insurance policies to Paul. Based on his updated income, he was immediately disqualified from receiving the governmental benefits he needed. Thus, instead of supplementing Paul's benefits and improving his quality of life, the life insurance proceeds prevented him from receiving the best care available. In order to re-qualify for governmental benefits, Paul will have to "spend down" his entire inheritance, as well as re-apply for reinstatement of his benefits.
Execution Pointer: If your child or other beneficiary has special needs and receives governmental benefits (SSDI, Medicare, etc.), you do not want to unintentionally disqualify them from receiving these benefits which offer the best care available. Consider creating a special needs trust and designating the trust as the beneficiary of your life insurance policy. This will ensure that your loved one can continue to receive governmental benefits while simultaneously allowing them to benefit from the inheritance you left for them.

Issue #3:  Designating One Child as Beneficiary:

 Johnny and Susan raised three children, Paul, Ben, and Leslie. According to Johnny and Susan's estate plan, each child was to receive an equal share of any and all assets. Following Johnny's death, Susan designated Leslie as the beneficiary of her life insurance policy since Leslie was the "most responsible" child. Susan's intent was for Leslie to receive the proceeds from the policy and divide and distribute them equally to her and her brothers. Susan repeatedly told each of her children that they would receive one-third of the proceeds from her life insurance policy.
After Susan's death, Leslie had a falling out with Paul and Ben. Per Susan's beneficiary designation, the life insurance company paid the proceeds from the policy to Leslie. Instead of sharing the life insurance proceeds equally with her brothers as was intended, Leslie kept them for herself, and also took one-third of the remaining assets in Susan's estate. Paul and Ben are out of luck and left without recourse.
Execution Pointer: While every parent hopes that their children will get along after their death, sometimes this simply does not happen. Contentious situations like this can be avoided by naming your estate as the beneficiary of your life insurance policy, thus bringing it into your estate for distribution according to your estate plan. Alternatively, you can designate a class of beneficiaries (i.e. "all of my children who survive me").
Let Chambliss Help Execute Your Plan:
At Chambliss, we don't simply give you the game plan and send you home – we help you execute from start to finish. Whether it is investigating your current beneficiary designations to ensure they are properly made, changing your old beneficiary designations to ensure they will work with your current estate plan, or updating your estate plan and beneficiary designations to address changing desires or concerns, the Estate Planning team at Chambliss is committed to helping you create – and execute – a comprehensive estate plan that meets all of your goals.