Beneficiary Designations and Asset Titles – Simple, But Crucial Planning Issues

One of the most common estate planning mistakes is failure to change names on the title of assets and beneficiary designations. This rarely a problem when one first visits with an estate planning lawyer to create a new plan, because, so long as the work is competent, the professional will ensure these issues are properly handled. However, when one tries to handle matters on their own or does not properly update their plan to account for life changes, then even a plan that was good at the time will not work when needed.

Wills and trusts are legal documents that name beneficiaries for assets that pass via the will or are placed in the trust. However, regardless of what is said in a will or a trust documents, many significant assets may have their own beneficiary designations. Those designations will control who gets the asset.

Beneficiary designations apply frequently with assets like IRAs, 401(k)s, company benefit plans, and insurance plans. These assets have their own “payable upon death” designations which decide who will receive benefits, regardless of what other estate planning documents indicate.

In New York, real property assets, like a house, designate ownership via deed. Property laws allow individuals to own these assets in various ways, such as retitling to a trust. If titled in this way, at an individual’s death, the real property will be distributed to those beneficiaries named in the trust.

Our New York estate planning attorneys appreciate that these errors occur frequently. They are most common in situations where estate plans are not thoroughly reviewed after a second marriage. For example, it is common for retirement or insurance plans to name a spouse as a beneficiary. That may not automatically change upon divorce. Even if a subsequent document indicates a different intent, the beneficiary designation will control.

Proper checklists and consistent review of one’s plan are the best avenues to avoid mistakes with titles or beneficiary designations. Unfortunately, some residents are under the mistaken assumption that new planning documents will somehow automatically trump old designations.

When these mistakes are made the consequences can be far-reaching. Of course, it means assets may flow to the wrong person. There also may be unintended estate and income tax consequences. Well-tailored estate plans have interconnected components. Careful calculations are made about who is getting what and how they are getting it in order to account for tax laws. If those calculations are off because of unknown beneficiary or title designation issues, then the entire tax strategy might not work as desired.

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