Estate Planning: Update Those Beneficiary Designation Forms

Miller & Martin PLLC Alerts | April 30, 2020

Author: Jennifer Smith

If you have a bit of extra time on your hands while weathering the COVID-19 situation, it’s a good chance to think about your estate plan. Today’s alert addresses the importance of updating beneficiary designation forms.

Most financial accounts and life insurance policies include a beneficiary designation form (also called “transfer on death” forms or “payable on death” forms) that you complete when you first set up the account or buy the insurance policy. Many people set these up early in life or in their career and forget to update them with changes in life circumstances, such as upon marriage or divorce, or the birth of a child.

Change in Marital Status: While you were single, you probably named your parents, your siblings, etc., as the primary beneficiaries of your life insurance and/or investment accounts to receive the assets upon your death. If you get married and do not change the beneficiary to your spouse, he or she will not receive those benefits upon your death. A similar issue arises in the event of a divorce. If you named your spouse on your beneficiary designation forms and later divorce that spouse, you must make it a priority to remove that spouse’s name from those forms, otherwise, he or she will still receive those assets upon your death. There are twenty-six states that have statutes providing for revocation-on-divorce for beneficiary designation forms (AL, AS, AR, CO, FL, HI, ID, IA, MA, MI, MN, MT, NV, NJ, NM, NY, ND, OH, PA, SC, SD, TX, UT, VA, WA, WI). Tennessee has a revocation-on-divorce statute, but it only applies to provisions for ex-spouses in wills; it does not address beneficiary designation forms. It provides that any provisions you made for an ex-spouse in your will are revoked, but the remainder of the will stands. But again, if your ex-spouse is still named on your beneficiary designation forms, he or she will receive those assets upon your death.

What happens if your spouse dies, you forget to remove his or her name from your beneficiary designation forms, and then you die? In that event, the assets would be paid to the contingent beneficiary / beneficiaries you have listed on the forms. If you have listed none, the assets are paid to your estate, unless the forms specify otherwise, and are distributed by the terms of your will if you have one, or by intestate succession if you do not have a will.

Children as Designated Beneficiaries: If you name your children as either the primary or contingent beneficiaries on your beneficiary designation forms, there will be issues arising if they are still young at the time of your death. If the children are minors at your death, the assets will be paid into the probate court to be held until each child reaches age 18, at which time he or she will receive his or her share of the assets, outright and free of trust or restrictions. This is usually not an ideal situation for most 18-year-olds as they are likely to waste those funds quickly. Another issue is that during the time before the children turn 18, the children’s guardian may need access to the funds for the children’s support. To gain access, the guardian must apply for a conservatorship over the assets. A conservatorship is a legal proceeding that can be expensive and burdensome for the guardian both in establishing the conservatorship and in complying with ongoing reporting requirements to the court.

To avoid these problems, it is better to name as the beneficiary a trust that you establish for the benefit of your children, whether it’s a trust you establish during your life or one that you establish in your will. You would name the trust specifically as the beneficiary on your designation forms (e.g., “The Children’s Trust I established on 6/1/20” or “The Testamentary Children’s Trust as outlined in my will dated 6/1/20”). If your children are older than the parameters of either type of trust at the time of your death, the assets would then flow to them outright. But if they are younger than the age parameters you specify in the trust, their assets will be managed for their benefit by the trustee and distributed outright to them when they reach the age that you specify.

The estate planning attorneys at Miller & Martin PLLC are available to discuss the various concerns regarding beneficiary designation forms as well as all of your estate planning needs. Feel free to contact attorney Jennifer Smith, or any of our Trusts, Estates & Wealth Management attorneys to schedule a consultation.

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