Category: Estate Planning

The Importance of Reviewing Your Beneficiary Designations

Question:  I am fifty-eight years-old and have a brother nine years my senior.  My father, who died recently, executed a Will in which he left all of his assets equally to my brother and me.  Before I was born, my father had enrolled in his employer’s retirement plan and designated my brother (then his only child) as the sole beneficiary of that plan.  Here’s my problem: my father never changed the beneficiary designation of his retirement plan to add me.  My brother told me that he will not share the benefits of my father’s retirement plan with me.  That’s terribly unfair because my father, in his Will, clearly desired that my brother and I share his entire estate equally.  Can I can do anything to obtain half of my father’s retirement monies? Very upset, Sarah T.

Answer:  Sarah, although your father’s Will makes it clear that he wanted you and your brother to share equally in his estate, his failure to change the beneficiary designation in his retirement plan to include you, now prevents you from obtaining any of the proceeds from that plan.  Sadly, most people do not understand that the person or persons named as beneficiaries of various assets, including retirement accounts (such as IRAs and 401Ks), life insurance policies, trusts, annuities, jointly-held real property, certain types of bank accounts, and many other similar assets, receive those monies outside of, and regardless of, the language of the Will.  The fact that your father’s Will provides for an even split of his assets between you and your brother has no effect on his beneficiary designations.  So, Sarah, we’re sorry to say that the only way you can obtain your rightful share of your father’s retirement plan is to work it out with your brother—and that seems unlikely under the circumstances.

We urge our clients to check their beneficiary designations on a regular basis. Lifetime changes such as marriage, birth, death, divorce, new financial circumstances, and other factors must be taken into account when you consider, or reconsider, your estate plan.  And you should never create, or review, your estate plan without reviewing your beneficiary designations. We strongly recommend such a review every two to three years.

We are pleased to review estate documents and beneficiary designations as a courtesy to clients  Feel free to call to make an appointment.

You should review your estate documents including your beneficiary designations every three years or whenever a significant change occurs in your life circumstances.

POWERS OF ATTORNEY

 Question:  After procrastinating for years, my wife and I have decided to create an estate plan.  Are there any documents, other than a will, that we need?  Patrick R.

Answer:  Patrick, you’d be amazed about how many telephone calls and e-mails we get from clients asking us to “make a will” for them While a will is an essential part of most estate plans, it is not the only document that should be prepared.  A thorough estate plan should include a Power of Attorney, an Advance Directive for Health Care (also known as a Health Care Proxy) and, for some, a Living Will.  Several types of Trusts may also be considered, depending on each individual’s circumstances.  In addition, serious thought should be given to reviewing beneficiary designations in life insurance policies, retirement plans, pensions, even bank accounts.  And thoughtful tax planning is also an integral part of an estate plan.  In this edition of the LawLetter, we’ll talk about the Power of Attorney.  We’ll discuss other estate planning documents and ideas in future editions.

Our answer to Patrick’s question starts with a question:  If you become mentally or physically incapacitated, who will make financial decisions for you until you get better?  Who will look after your business?  Pay your bills?  Cash your paycheck?  Sign important legal documents?   Pay taxes?  Buy or sell stocks or other assets?   Clearly, you would want someone you trust to take care of these important matters issues for you.  Other common situations in which you might empower your “agent” to act for you are real estate transactions, banking transactions, insurance matters, Social Security  and Medicare matters, estate matters, litigation, transactions involving retirement or pension benefits; and many more.

So what is a Power of Attorney?  It is a written document by which you (the “principal”) give a trusted person or persons (the “agent” of “agents”) the authority or “power” to act on your behalf.  Contrary to popular belief, an agent does not have to be attorney.  People generally appoint their spouses, parents, adult children, trusted friends, etc., to serve in this important capacity.  The authority your give to your agent can be very broad, or quite limited, depending on your wishes.

A problem that frequently arises if one does not have a Power of Attorney, is that relatives or other loved ones may have to petition a Court to appoint a Guardian to manage financial affairs.  Guardianship proceedings can be expensive, time-consuming, and embarrassing.  Your loved ones will have ask a judge to rule that you are “incompetent” to handle your own affairs—a very public airing of a very private matter.  That is unfortunate and tends to create family discord.

Recently, the State of New York amended the laws relating to Powers of Attorney by adding greater protection for the “principal’ from the actions of less-than-faithful “agents.”  While an already-existing power of attorney is still valid (if properly prepared), the new law adds many important protections.  We’d be pleased to talk to you about updating your Power of Attorney.

As always, if you have questions about any type of estate matter, feel free to write or call.

WHAT IS ESTATE PLANNING — AND DO I REALLY NEED IT?

Estate planning is a dynamic process that involves far more than what happens to your assets (your property) after you die.  By intelligently “planning your estate,” you (rather than a judge) can determine, among other things:

How, and by whom, your assets will be managed for your benefit during your lifetime if you become unable to manage them yourself;

When and under what circumstances it makes sense to distribute your assets during your lifetime;

How, and to whom, your assets will be distributed after your death;

How and by whom your personal care will be managed and how health care decisions will be made during your lifetime if you become unable to care for yourself;

Many people mistakenly think that estate planning only involves the writing of a will.  That’s not true.  Estate planning can, and should, involve financial, tax, medical, and business planning.  Although a will is almost always part of the estate planning process, you also need other documents to fully address your estate planning needs.

There are many issues to consider in creating an estate plan.

First of all, ask yourself the following important questions:

• What are my assets and what is their approximate value?
• Whom do I want to receive those assets—and when?
• Who should manage those assets if I cannot—either during my lifetime or after my death?
• Who should be responsible for taking care of my minor children if I become unable to care for them myself?
• Who should make decisions on my behalf concerning my care and welfare if I become unable to care for myself?

Virtually every adult needs estate planning—whether the estate is large or small.  First, you should always designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself.  If your estate is small, you may simply focus on who will receive your assets after your death, and who should manage your estate, pay your last debts and handle the distribution of your assets.  If your estate is large, you should consider various ways of preserving your assets for your beneficiaries and of reducing or postponing the amount of estate tax which otherwise might be payable after your death.

Whether you know it or not, you already have an estate plan.  If you fail to plan ahead, a judge will simply appoint someone to handle your assets and personal care. And your assets will be distributed to your heirs according to a set of rules known as intestate distribution.  And those rules may not mirror your desires as to your choice of heirs.  An estate plan gives you much greater control over who will inherit your assets after your death.  You should seriously consider creating your estate plan.

When a client asks us to create an estate plan, we give serious consideration to plan for changes that may occur in our client’s life. Such “contingency” planning is included in the primary estate plan document, whether a Last Will and Testament (“Will”), a Trust, or both.

For purposes of this article, assume that our client, Mary, a widow, has come to us to create her Will, and has three children: Stephanie, James, and John.

Executor

You’ve probably heard the phrase “executor” before. The executor is the person who the testator (the person making the Will) nominates to be in charge of carrying out the wishes of the testator (the person who makes the Will) or the Grantor (the person who creates the Trust). For example, if Mary’s Will directs that her personal property (jewelry, household furnishings, and the like) be given to her three children upon her death, the executor would be responsible for making sure that the personal property is actually distributed to the children. (The executor has other duties, too, but such duties are beyond the scope of this article).

At our meeting with Mary, she indicates that she would like her daughter, Stephanie, to serve as her executor. We would recommend to Mary, however, that she designate one or more successor executors, in case Stephanie is unable or unwilling to serve in that role at the time of Mary’s death.  For example, if Stephanie predeceases Mary (passes away before Mary), and Mary does not name a successor executor, (and has not updated her Will after Stephanie’s death), the Surrogate’s Court would then be responsible for appointing an executor to serve. (In this scenario, the executor appointed by the Court may not be the same person Mary would have chosen to be her executor).  On the other hand, if Mary had named her son, James, as her first successor executor in her original Will, then James would have been able to petition the Court to be officially appointed as executor, in light of the fact that Stephanie passed away.  In this way, Mary has retained complete control over who is appointed as executor of her estate.

Beneficiaries

A beneficiary is a person whom the testator designates to receive his or her property in a Will or Trust.  For example, a testator may choose to make a bequest (gift) of a specific piece of his or her property to specific person.  In the instant scenario, for example, Mary may choose to leave her jewelry to her daughter, Stephanie.

However, let’s assume that Mary chooses not to make any specific bequests in her Will, but desires instead to leave her entire estate outright to her three children, Stephanie, James, and John, in equal shares.  This is perfectly fine, but what happens if Stephanie or James or John predeceases (dies before) Mary?  While Mary can always create a new Will at any time to account for any predeceased children, what happens if Mary doesn’t have a chance to update her Will before she dies?  We, therefore, recommend that Mary make certain provisions in her Will to describe what would happen to her assets in case any of her children predeceased her.

For example, assume that Mary’s three children, Stephanie, James, and John, all have children of their own (Stephanie – 5 children; James – 2 children; John – 1 child).  Mary may wish that if any one of her children predeceases her, the share of her estate that such predeceased child would have received go to her predeceased child’s children instead. In this scenario, we would draft the Will to state that the estate is being left to Mary’s “issue, per stirpes.”  “Issue” means a person’s “lineal descendants,” who are the person’s children, grandchildren, great-grandchildren, etc., and “per stirpes” is a Latin phrase meaning “by the stalk.”  This seems complicated, but it is actually quite simple.  An illustration may be helpful:

Let’s say that Mary’s estate is being left to her “issue, per stirpes.”  Assuming Mary’s three children are alive at the time of her death, this means that Stephanie, James, and John will each receive a one-third (1/3) share of Mary’s estate.  If Stephanie predeceases Mary, however, under a “per stirpes” distribution, Stephanie’s five children will equally share the one-third (1/3) share that Stephanie would have received had she survived Mary, and James and John will each receive a one-third (1/3) share of Mary’s estate.  Changing the facts slightly, if Stephanie and James both predecease Mary, then Stephanie’s five children will still equally share Mary’s one-third (1/3) share, and James’ two children will equally share the one-third (1/3) share that he would have received had he survived Mary.  In this scenario, John will still receive a one-third (1/3) share of Mary’s estate.

Using the same facts as above, another option is for Mary to leave her estate to her “issue, by representation.”  This is similar to a “per stirpes” distribution, but with some distinct differences.  Again, an illustration may be helpful (assuming the same facts as above):

Assume Mary’s estate is being left to her “issue, by representation.”  If Mary’s three children are alive when she dies, Stephanie, James, and John would each receive a one-third (1/3) share of Mary’s estate (the result is the same as it would be under a “per stirpes” distribution).  Similarly, under a “by representation” distribution, if Stephanie predeceases Mary, Stephanie’s five children will equally share the one-third (1/3) share that Stephanie would have received had she survived Mary, and James and John will each receive a one-third (1/3) share of Mary’s estate (again, this is the same result as it would be under a “per stirpes” distribution).  Changing the facts slightly, if Stephanie and James both predecease Mary, the distribution to Stephanie’s and James’ children will be quite different under a “by representation” distribution compared to a “per stirpes” distribution: under “by distribution,” the one-third (1/3) shares that Stephanie and James would have each received had they survived Mary will be combined into a single two-third (2/3) share, and said two-third (2/3) share will be shared equally by  all of Stephanie’s and James’ children. This means that all seven children (Stephanie’s five children and James’ two children) will each receive an equal portion of the two-third (2/3) share.

Compared to a “per stirpes” distribution, Stephanie’s five children are each receiving a larger share of Mary’s estate under the “by representation” distribution, while James’ two children are each receiving a smaller share of the estate than they would have under a “per stirpes” distribution.”  In this scenario, however, all of Mary’s grandchildren who are the children of her predeceased children are receiving an equal share.

Clearly, this is not a simple subject, and this article only touches on the various options that one has when making his or her estate plan. What is clear is that contingency planning be given serious consideration in the preparation of an estate plane. Of course, we would be happy to discuss your estate plan in detail with you during a complimentary consultation.