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Contingencies

Jul 20, 2007

As a lawyer, I am trained to look for the worst case scenarios in a given situation. This is especially important in the estate planning field because there are so many variables when assisting clients in planning the disposition of their estates.

One of the unknown variables is whether a named beneficiary will be alive when the time comes time to distribute the estate. If the beneficiary is not alive at that time, whom does the client wish to benefit? A child or grandchild? A niece or nephew? A charity or organization?

Most clients I work with are able to name alternate beneficiaries if their loved ones cannot receive the complete distribution of their gift. We set forth contingent beneficiaries in their living trusts to designate who receives the trust assets. We also may designate contingent beneficiaries for property that is distributed by the client’s Will.

However, I have noticed one area in which clients need to be more diligent in ensuring their wishes are carried out: naming alternate and contingent beneficiaries of the assets that pass outside of their trust or Will.

CONTINGENT BENEFICIARIES ARE NECESSARY FOR CERTAIN ASSETS

Certain assets are not controlled by a person’s Trust or Will. Most common of these assets are life insurance, IRAs or other qualified plans, and annuities. Upon a person’s death, these assets are paid to whomever the person designated as a beneficiary.

Recently, I have seen clients name their spouse as the designated beneficiary of their life insurance and retirement assets. Few, however, have designated an alternate beneficiary if their spouse is not then living. It is not safe to assume that if your spouse is not living then your children will inherit these assets if they are not specifically named. The asset may end up passing to someone else unintentionally.

For example, if a person designates his spouse as the beneficiary of his life insurance policy and the spouse has died, the life insurance company will process the claim as if the person did not designate anyone as a beneficiary of the policy and thereby will pay it to the person’s “estate”. This means that the life insurance proceeds, which otherwise would pass directly to a loved one (without charge or delay), must go through the probate process (which in Los Angeles County takes a minimum of a year) before being paid to the person’s heirs.

Such a mistake can be costly. In California, current probate fees are quite high – $4,000 for the first $100,000 in estate value, plus $3,000 for the next $100,000 in value and 2% of the next $800,000 in value. These fees are calculated without offsets for liabilities of the estate.

MINORS AS BENEFICIARIES REQUIRE SPECIAL ATTENTION

Even when a person names an alternate or contingent beneficiary, such designation requires careful attention, especially if the beneficiary is a minor or under a legal disability which would prevent receipt of the gift.

If a minor is the designated beneficiary, proceeds would be paid to the legal guardian who most likely would need to show actual court appointment as the guardian of the minor’s estate. Most companies will not pay to the natural parent of a minor child without a court order.

Retirement assets have a complex set of rules for distributions upon the death of the participant. In some cases, specialized designated beneficiary forms need to be created. For example, you might be able to name a child as the contingent beneficiary, but state that if the child is a minor, then the proceeds are payable to either the guardian or the Trustee of a trust which may be established for the minor child under the participant’s living trust.

And of course, perhaps there should be an alternate contingent beneficiary if the child or secondary beneficiary is not then living. The important thing is to not designate your spouse as the beneficiary without planning for the possibility that the spouse may not be around to receive the benefit.

ASSET TITLE IS IMPORTANT

The importance of naming contingent beneficiaries of your asset which are not controlled by the terms of your Trust or your Will cannot be over-emphasized.

The reason this is important is that how an asset is titled will control what happens to it upon your death.

Assets that are titled in your name as Trustee of your Living Trust, will be subject to the control of the successor Trust upon your death who will distribute the property as you direct in the Living Trust agreement.

Assets that are titled in your name alone, however, will be disposed of by the terms of your Will, if you have one, or by the State of California’s law for intestacy if you don’t have a Will.

Take a moment to review the name under which your current assets are registered. Do statements come to you just in your name? In the name of your Trust? Review your beneficiary designation for all life insurance policies, IRAs, qualified plans, and annuities. Be sure they accurately reflect how you want to have your property distributed if your first choice of recipient is unable to receive it. You won’t be sorry.

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