The ability to place payable on death (POD) or transfer on death (TOD) beneficiary designations on most assets can be a simple and cost-effective way to pass your estate to loved ones. However, the quickest and most affordable options can come with traps. Below are 5 myths associated with beneficiary designations.
Myth 1: “The plan administrator will always follow my most recent estate plan.”
Very often, people will put beneficiary designations on assets and then make changes to their estate plan (Will or Trust). It is important that the beneficiary designations be changed AFTER the estate planning is updated so that the intended outcome of the estate plan is fulfilled. Consider a case where a man listed his siblings as beneficiaries on his retirement assets many years ago. He later married and became close with his stepsons. After his wife died, the man executed a new Will naming his stepsons as his heirs. He did not update his beneficiary designations on his retirement assets. When the man died, the stepsons were shocked to learn that they would not receive his retirement assets, contrary to the man’s express wishes.
Tip: in contemplation of changes to estate planning, always check on the status of beneficiary designations and plan to update same immediately upon execution of the new estate planning documents.
Myth 2: “It is my asset, I can name whomever I want as my beneficiary”
Although single persons can list individuals, trusts or charitable organizations as beneficiaries, married persons may have to name their spouse as a beneficiary unless the spouse waives the right to receive the benefit. This is true of all ERISA retirement plans through employers such as a 401(k), 457, 403(b) and traditional pension plan. Furthermore, in community property states like Wisconsin, life insurance policies must name the spouse of the policy owner first or obtain the consent of the spouse to name another beneficiary. Community property states also provide avenues of recovery for surviving spouses who did not receive their share of community property upon the deceased spouse’s death. Recovery, in these instances, typically involves court litigation and can be costly and stressful to all involved.
For individuals going through a divorce, it is critical to update beneficiary designations post-divorce, particularly if the now ex-spouse should continue as a beneficiary. By operation of law, all beneficiary designations of an individual naming a spouse will be null and void upon divorce. Although it may seem counter-intuitive to name an ex-spouse, such arrangements can be vital to support an ex-spouse or minor children if the asset owner or insured dies unexpectedly. Life insurance, in particular, often serves as a safety net if a payor of spousal support or child support cannot meet his or her obligations due to unexpected death.
Tip: If you are married, talk with your spouse about beneficiary designations and obtain his or her consent if naming a primary beneficiary other than the spouse. Most plan administrators or insurance companies will provide a waiver and consent form for the spouse to sign. If you are recently divorced, call your plan administrator or insurance agent to make necessary changes.
Myth 3: “Beneficiary designations are the best way to pass assets to my loved ones.”
Beneficiary designations are not a “one size fits all” planning technique. Certain individuals should not be named outright as beneficiaries without first consulting an estate planning attorney. Minor children cannot manage their assets outright and listing them as beneficiaries will usually necessitate a court appointed representative to hold the assets. Individuals with disabilities, those suffering from addiction and spendthrifts are at risk if named outright as beneficiaries. Serious consequences such as the loss of valuable public benefits, waste, mismanagement and undue influence should deter one from naming a beneficiary with “special needs”.
Tip: Consider working with an estate planning attorney to put forth a plan to protect the interests of minors, disabled and other beneficiaries who should not receive assets outright.
Myth 4: “Completing payable on death beneficiary designations on assets will avoid Medicaid Estate Recovery if you or your spouse receive Medicaid benefits”
For frail elderly and individuals with disabilities who wish to apply for certain Medicaid benefits, such as nursing home and home and community-based waiver programs, diverting assets from a probate estate by use of beneficiary designations may not prevent Medicaid estate recovery upon death.
In 2014, the rules regulating the Wisconsin Estate Recovery program were updated to allow Medicaid to recover funds from a recipient’s life insurance policies, annuities and other non-probate assets. There is a limited exception for life insurance policies purchased before August 1, 2014.
Furthermore, as a condition of Medicaid eligibility, all irrevocable annuity policies purchased or created on or after January 1, 2009 must name the State of Wisconsin as a remainder beneficiary unless there is a surviving spouse, disabled child or minor child.
Tip: If you or a loved one are contemplating applying for Medicaid, consult with a knowledgeable elder and special needs planning attorney about estate planning for Medicaid recipients.
Myth 5: “Use of a Transfer on Death Deed for my home or other real estate affords my loved ones critical time to take ownership and to dispose of the home.”
Transfer on death deeds are one way to avoid probate for homes and other real estate. The deed transfer works well if there is a sole beneficiary or if multiple beneficiaries agree as to the ultimate disposition of the property. However, if beneficiaries are in conflict as to whether the property should be retained or sold, who will occupy the property, and who is responsible for necessary repairs and maintenance, the original owner of the real estate is setting up a nightmare scenario for all involved. Unlike trusts or probate estates where there is an appointed representative to take charge and exercise discretion, transfer on death deeds do not provide for a process for resolution of disputes and responsibility for costs/expenses.
Tip: Before signing a Transfer on Death deed, talk to your loved ones about their desires for the property and ascertain the likely level of conflict between named beneficiaries. It is helpful to speak with an estate planning attorney as to other options for the transfer of real estate.