Here’s what can override your wishes even if you have a will
There are certain rules that dictate who gets your money, regardless of what wishes you express in your estate planning documents. – SeizaVisuals/E+/Getty Images
Maybe you’ve heard of “The Gentle Art of Swedish Death Cleaning.” It’s a guide to proactively downsizing your stuff while you’re still alive. Doing so spares your heirs the mess of doing it themselves, and the potential fights they may have in the process.
Similarly, you can avoid leaving a mess behind for your family by being meticulous now about identifying who you want to get your money but also knowing a little about how the process will play out when you’re gone.
Specifically, you should be aware of the importance of naming beneficiaries on key financial accounts, such as your 401(k)s and IRAs, as well as your life insurance policies and annuities, and sometimes even your brokerage and banking accounts.
Put simply, anyone you name as a beneficiary on those accounts will be the person who gets the money, regardless of the wishes you express in any of your other estate planning documents.
“If you have designated beneficiaries on an account and they’re living, that trumps your will or trust — unless the beneficiary designation is to the trust,” said Jeffrey R. Gottlieb, an estate planning attorney in the northwest suburbs of Chicago.
It will also streamline the process of the money from a given account being transferred quickly to your beneficiaries. That’s because the account with named beneficiaries won’t be in the part of your estate that must go through the court process of probate, which authenticates your will after you die and allows for the net proceeds of your estate to be distributed to your heirs once your debts and expenses are paid.
Settling your estate can be very upsetting for your family if a financial account is given to a beneficiary who was not in your life at the time you died. Think here about an ex-spouse you no longer want to leave money to but whose name you never took off the account. Or a person you named as a beneficiary who has already died.
That’s why, Gottlieb said, “It’s very important to update your beneficiary designation whenever there’s a (big) life change.”
In the case of a beneficiary who pre-deceases you, the person next in line to get their share of your money will depend on what you specified when filling out your beneficiary form.
For example, say you left half of your 401(k) to your brother. If he dies before you, who do you want to get his share? His children? The other account beneficiaries? Someone else entirely? A charity?
“It’s always important to consider when doing a designation whether you want a beneficiary’s kids to receive it, or other beneficiaries,” Gottlieb said.
If you haven’t named any beneficiaries, the default beneficiary for your account in most instances is your estate.
“If you don’t name them on accounts, the money gets marshalled into your estate and goes through probate court,” said John Rossi, an Ohio-based attorney with probate estate litigation experience and a consultant to Steward, an online estate planning service that provides a technology platform to create a trust with guidance from attorneys.
And if you die without a valid will also, how your assets get divvied up will be determined by the intestacy laws of the state where you were living when you died. That is, each state determines who is entitled to inherit your assets and in what order, although Gottlieb said some 401(k) plans may automatically default to your spouse or children. So it’s a good idea to find out what yours says specifically.
Just as the accounts on which you name beneficiaries will be able to bypass the probate process, so too will anything you include in a trust.
Trusts, which are no longer just the go-to estate planning tool for the wealthy, are somewhat more complex and expensive to set up than a will. But a trust can offer you more control over how your assets eventually get distributed.
For example, say you want to leave your 401(k) to your kids. But they are too young to manage that inheritance — i.e., under 18. Or maybe you have an adult child who has an addiction and/or is very poor at managing money. Or you have a child who is disabled and will need lifelong financial support. If your kids are named directly on your 401(k) account itself, the money would be paid out to them immediately. But if you set up a trust for them and name that trust as a beneficiary of your 401(k), you can dictate the terms and dates of how that money is managed and when it should be paid out to them.
“Think through how that money will flow to those beneficiaries,” Gottlieb said, noting that you may want the money to stay in the trust for a long period of time or you may want it paid out over a specific number of years.
But whenever making those kinds of decisions, he added, you and your estate attorney need to be mindful of the tax implications as well as legal requirements under laws like the federal Secure Act, which requires beneficiaries take their distributions from an inherited IRA over a fixed number of years.
Chances are you have a busy life and many financial accounts and policies, some of which were set up years ago,
So this is your reminder to a) check who you named way back when; and b) make sure those names still reflect the people you want to have your money, especially if their (or your) family structures and financial fortunes have changed dramatically since you first named them.
And, if you still haven’t named any beneficiaries on your accounts, now is as good time to do so as any.
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