There are several common problems we see with beneficiary designations.
First, there is the “unintentional beneficiary”. These occur when we are fairly certain that the owner of the account added another person as a convenient signer, but the bank created, without the owner’s knowledge, a “joint right of survivorship account.” Surely the bank will fix that mistake? The answer: absolutely not. The bank will point to the fine print of the account agreement that creates the right of survivorship. They are not required to highlight this to the account owner. The account owner is not required to initial or give specific consent. Therefore, we are confident that, in many situations, the account owner did not know that they were making a gift of their account to one person when they died.
Second, what happens if the beneficiary of an account, whether it is an IRA, bank account, life insurance, or some other asset, predeceases the account owner. Then there is simply no beneficiary. There is no rule that provides, for example, that if the beneficiary is a child the account will then be payable to the child’s heirs. An account without a beneficiary designation usually becomes an asset of the estate. Here again, financial institutions are more and more working in boilerplate fine-print language in their account agreements that allow them to decide who gets the money, regardless of the will or any other documents.
Third, what if the beneficiary is incompetent or should not be receiving the funds? The standard estate planning documents prepared by Pyke Balen & Moncure provide alternatives if a beneficiary has died, is incompetent, or is a “special needs beneficiary”. A special needs beneficiary is someone who is already qualified for government benefits like Medicaid, and an inheritance would disqualify those benefits. Although our estate planning documents address these issues, beneficiary designations do not.
In summary, beneficiary designations often fail because they lack flexibility, consideration of future events, other contingencies, and the true intent of the account owner.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, specific tax, legal or accounting advice. We can only give specific advice upon consulting directly with you and reviewing your exact situation.
