Myopia Can Be Hazardous – Part Two

INTRO: In Part One of this series, we discovered that well intentioned people are frequently short-sighted when it comes to estate planning. Here is a second common type of estate planning myopia that can lead to significant problems.

2) Neglecting to submit beneficiary designations on retirement plans and life insurance policies: Retirement plans, such as 401(k)s and IRAs, are legally owned by the plan participant; not by the participant’s Living Trust. Fortunately, probate is avoided on the death of the plan participant because the beneficiary(ies) who are designated and on file with the retirement plan custodian are entitled to the retirement account. The same concept applies to life insurance contracts.

Myopia occurs when a retirement plan participant or life insurance contract owner: a) never submits a beneficiary designation form to the retirement plan custodian institution or life insurance company; or b) designates a primary beneficiary but no secondary/alternate beneficiary; or c) doesn’t designate new beneficiaries when desired; or d) fails to integrate these beneficiary designations with his estate plan (e.g. Living Trust).

It is very unfortunate when a retirement plan owner dies and there is no then-living designated beneficiary on file with the custodian. This sometimes occurs when the primary designated beneficiary is deceased and no secondary beneficiary is designated. In this situation, the account is subject to probate.

Another problem stems from this fact: many people don’t realize that beneficiary designations “trump” Living Trusts and Wills. Let’s suppose that Betty is the beneficiary of your Living Trust and Will, but Bill is designated as beneficiary of your retirement plan. Bill takes your retirement plan.

It’s ironic and sometimes tragic that people do not attend to their beneficiary designations carefully, even when large sums are at stake. Some years ago, I was involved in a case in which my client had been the designated beneficiary of a $3 million life insurance policy owned by her husband. They divorced. Fifteen years later, he died. She was entitled to, and received, the $3 million death benefit. It’s uncertain whether my client’s ex-husband wanted that result; however, it’s possible, if not likely, that due to his myopia, he simply never submitted a new beneficiary designation form (naming someone different) following their divorce.

This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.

Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.

ESTATE LEGAL SERVICES: Need to find an estate planning attorney in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on Revocable Living Trust, Wills, Durable Power of Attorney, Advance Health Care Directive, Special Needs Trusts, and Irrevocable Trusts & Advanced Estate Planning, including Irrevocable Life Insurance Trust (ILIT), Qualified Personal Residence Trust (QPRT), Defective Grantor Trust (IDGT), Grantor Retained Annuity Trust (GRAT), “Crummey Trust”, and various types of Charitable Trusts.