When I was in law school, we read a lot of court cases, but we rarely read cases about what went right.  Instead, we read cases where something went wrong.  This was true concerning wills and the cases concerning estate plans.  We didn’t read court cases about how there were no disputes or disagreements, but rather we read about things that went wrong.  When things go right, there tends not to be court cases started or written opinions from judges to decide things…instead there is just a fairly simple and straightforward transfer of assets from a deceased person to the named beneficiaries or heirs, and nothing needs to be written about a non-dispute.  This is the goal to strive for in an estate plan – a transfer of assets that doesn’t need to end up as a court case, or become a case to be studied in law school for everything that went wrong.

One way to transfer assets quickly and easily is to use beneficiary designations to transfer assets.  A beneficiary designation is something that can be attached to a certain type of asset, like an investment account, retirement account, or a bank account.  There is even a beneficiary deed for real estate in Colorado.

A beneficiary designation will transfer an asset to the named beneficiary according to the terms of the beneficiary designation with the company that holds an asset, and the transfer to a designated beneficiary will happen before any transfer described in a will or a trust.  You want to set your beneficiary designations up in a similar manner to your estate plan, so as to not create confusion or conflicts.  And, once you have your beneficiary designations set up, you need to periodically review those beneficiary designations to ensure assets go where you want them to go!

 

Things Can Change As Your Life Changes and You Age

I have many clients who are in their 80s, 90s, or even over 100.  A lot of these clients have an adult child who has moved back in with the aging parent to care for them.  Many of the aging clients do not have much disposable income or much in the way of liquid assets, so the child becoming a caregiver makes a lot of sense.  The child who is giving care to their parents most likely is doing so because it is the right thing to do, but it does mean the adult caregiving child is not able to work other jobs.  Often, the parent will designate the caregiving child to receive proceeds from a life insurance policy or other financial asset, like an IRA, 401(k), or other retirement account.  This type of beneficiary designation gives the caregiving child a payout for the services rendered while the parent was alive and can happen fairly quickly after a parents’ death.  By using a beneficiary designation to pay deferred compensation to a caregiving child, a parent can ensure the caregiving child is rewarded for their effort financially after the death of a parent, even if such payments could not be made when the parents were alive.  This can also happen with the proceeds from a sale of a house after a parent’s death, but to ensure a proper flow of funds, the beneficiary designations need to be updated to reflect the current situation for a parent.

I have also had many clients who have lost a child in an accident or to an illness.  The parents do not want to have assets transferred to someone who is deceased, so they will update their will or trust to reflect giving the deceased child’s portion to their other children or grandchildren.  When we do something like this, I always encourage the client to look at their life insurance and retirement plan beneficiaries, as they have often named a deceased child as a beneficiary on those accounts, and I want to make sure all of the beneficiary designations are working together to accomplish the current goals of my clients.

I also have clients who are divorced and who don’t want to leave anything to a former spouse.  When I help them re-write an estate plan to reflect their new circumstances, I also encourage them to update the beneficiaries of their life insurance policies, retirement accounts, and other similar accounts.  I will tell these types of clients that we need to make sure we root out all of the possible avenues that a former spouse might benefit from their death, and that seems to energize these types of clients for some reason…I cannot imagine why!?!  Other than a court-required life insurance policy to cover alimony or child support in the case of a deceased parent, people who are divorced tend to not want to leave assets to an ex-spouse.  I can understand and support that.

In all of the cases above, life circumstances changed, so the setup of beneficiaries changed to reflect the new life circumstances.  The changes meant that each person would have a relatively easy and smooth transfer of assets, so we would never hear from these people again, and there would not be a court case to read about them!

 

It Can Be Easy To Miss Some Life Changes That Mean Beneficiaries Need to Change

Without creating the need to be hyper vigilant about everything, and be paranoid about all beneficiary designations all the time, I do encourage people to check their beneficiaries every once in a while.  I have had clients encounter some common situations where they have forgotten to change beneficiaries, or neglected to do so, but really needed to do so.

 

Example 1:

I had a client who purchased a life insurance policy when they had two young children, aged 5 and 3.  This was a wise and sound decision to ensure their family’s financial future was secure if they passed away at a young age.  The client went on to have 2 more children.  By the time they met me, their children were aged 35, 33, 30, and 25.  I asked them if they knew who the beneficiaries on their life insurance policy were, and they told me it was their children.  I had them double check and they discovered it was only the first two children, and not all four children.  They were able to update their beneficiaries to include all four children, but if I hadn’t reminded them, that might not have been the case.

The reason this happened in the first place was because this client was likely in the midst of caring for their young children, which I know is a huge undertaking, and updating beneficiaries was not the highest priority to new parents.  I completely understand that situation, and I have been there myself with young children, but the beneficiary designation still needed to be updated when the time was right, and they were.  I wouldn’t have wanted two kids to be left out, and the kids certainly did not want to be left out, either!

 

Example 2:

As a client who recently went through a divorce told me, “I don’t want my ex getting anything!”  This is kind of the opposite of inadvertently leaving out a child…you intentionally want to exclude an ex-spouse.

I did have one person who came to me after their spouse had died, wanting to know how they could remove an ex-spouse as a beneficiary from a retirement plan that was set up more than 50 years ago.  The deceased person had married young in life, and the marriage did not last more than a couple of years, but the deceased person had set up the first spouse as beneficiary on the deceased person’s retirement plan at the place where the deceased person worked for 45 years before retiring.  Somehow, the deceased person had never changed the named beneficiary to the new spouse.  I let the widow know that she could claim a portion of assets under the spousal protection statutes in Colorado, but that the former spouse could not be removed entirely.  The grieving widow was very sad that this was the case.  I felt terrible telling her that was how the law worked, but there wasn’t much else I could do.

 

Example 3:

I also had a friend who was killed during his military service in the recent war on terror.  His mother had taken out a life insurance policy on him when he entered military service, and since my friend had been married just a couple weeks prior to his final deployment, the plan was to change the named beneficiary on the life insurance policy to his new wife.  However, no change occurred prior to his death, and so proceeds were paid out to the mother, and the new wife did not receive a payout.  They had many hurt feelings and disagreements over who should receive the money and to this day, I don’t know if they talk to each other any more.

 

Check Your Beneficiaries to Avoid Problems

You don’t want to be like the people in these last couple of stories.  You don’t want to be the one trying to sort things out after it is too late.  You don’t want to be a case to be read by future law school students.  You want your transfer of assets to be nice and boring, not worthy of any legal action.  If you review your beneficiary designations and have them be up to date like your estate plan, you won’t need to worry about court cases and disputes, but rather your desired beneficiaries or heroes will just get your assets when you die, and nobody will need to know what when wrong…because it all went right.  If you want to discuss how to have things go right with your estate plan, please click the button below.