Now that the holiday season is in full swing, we can look
forward to seeing family and friends. Sharing festive meals together. Decorating and enjoying each others’
company. And seeing the smiles on people’s
faces when they get that perfect gift from you.
It’s a great time of year.
With all of this activity, it’s a great time to review your
beneficiaries on all of your accounts and insurance policies.
I’m all set. Besides, it’s supposed to be a happy time of
year, not a time to talk about death.
True. But this is the
season of giving. Many clients I work
with don’t want to leave a large inheritance for their beneficiaries, but they
don’t want to leave headaches and a pile of bills either. They would rather gift peace of mind.
One common misunderstanding is leaving money to the estate
versus naming beneficiaries.
I was working with a client recently who just got
divorced. Understandably, she wanted to
take her ex-husband off as a beneficiary of her life insurance policy and keep
her 3 adult children on as beneficiaries.
Her initial thought was the designate her estate as the
beneficiary. After all, her only direct
heirs would be her 3 children.
So what’s the difference?
If she names her 3 children as beneficiaries, then upon her
death, money will be distributed from the life insurance to the children. In this case, each would have received 1/3.
But if she simply left the policy to the estate, the money
would still be paid. But it would be
used to pay off any debts of the estate first – credit cards, auto loans,
mortgage, etc. Then the estate has to go
through probate – which can take months even in the simplest cases.
The kids would eventually money, but likely a lot less than
what their mom had intended and after a substantial wait.
Certain types of accounts pass by contract at death. Life insurance, annuities, IRAs, and 401(k)s
are examples.
A second common misunderstanding is not understanding the
difference between per capita and per stirpes.
Best way to illustrate the difference is with an example. In the case of this divorced woman, only one
of her children is married and has children.
Under expected circumstances, each child would benefit as
follows:
Child A – One third
Child B – One third
Child C – One third
What happens if child A dies before the mom?
Under a per capita scenario, the following would happen:
Child A – deceased
Child B – Half
Child C – Half
Under a per stirpes scenario, the following would happen:
Child A – deceased
Child A’s beneficiaries – One third
Child B – One third
Child C – One third
Can you see the problems with both of these scenarios? One will leave out possible heirs –
grandkids, spouses. Another might leave
money to minor children or to an in-law spouse that you’re not fond of.
Beneficiary planning isn’t just putting a name down on a
form. There are a lot of pitfalls to
watch out for.
Ultimately, the question is: What do YOU want to have happen? Properly designating beneficiaries goes a
long way to making sure what you want to have happen actually happens.
When was the last time you had a beneficiary review? Take some time around this holiday
season. In between the meals, shopping,
and cider, think about what you want to have happen.
