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Many clients use beneficiary designations, and for good reason. Some significant assets, including life insurance policies, IRAs, retirement plans and even bank accounts, allow a beneficiary to be named. It’s free, it’s easy, and, when the owner dies, these assets are designed to be paid directly to the individual(s) named as beneficiary, outside of probate.

But that is not always what happens. For example:

• If your beneficiary is incapacitated when you die, the court will probably have to take control of the funds. That’s because most life insurance companies and other financial institutions will not knowingly pay to an incompetent person; they may insist on court supervision.
• If you name a minor as a beneficiary, you are probably setting up a court guardianship for the child. Life insurance companies and other financial institutions will not knowingly pay these funds directly to a minor, nor will they pay to another person for the child, not even to a parent. They do not want the potential liability and will usually require proof of a court-supervised guardianship.
• If you name “my estate” as beneficiary, the court will have to determine who that is. The funds will have to go through probate so they can be distributed along with your other assets.
• If your beneficiary dies before you (or you both die at the same time) and you have not named a secondary beneficiary, the proceeds will have to go through probate so they can be distributed with the rest of your assets.

Even if the funds are paid to the named beneficiary, things may not work out as the owner intended. For example:

• Some people just cannot handle large sums of money. They may spend irresponsibly, be influenced by a spouse or friend, make bad investment choices, or lose the money to an ex-spouse or creditor. If the beneficiary receives a tax-deferred account, he/she may decide to “cash out” and negate your careful planning for continued long-term tax-deferred growth.
• If you name someone as a beneficiary with the “understanding” that the funds will be used to care for another or will be “held” until a later time, you have no guarantee that will happen. The money may just be too tempting.
• If the person you name as beneficiary is receiving government benefits (for example, a child or parent who requires special care), you could be jeopardizing their ability to continue to receive these benefits.
• If your estate is larger, your choice of beneficiary could limit your tax planning options, causing serious tax consequences for your family.

Beneficiary designations can be quite useful, but they need to be considered as part of an overall estate plan.

In first marriages, the couple generally has the same goals when it comes to their estate planning: take care of the surviving spouse for as long as he or she lives, then whatever is left will go to the children. They may own many of their assets jointly and, at the death of the first spouse, more than likely everything will go to the surviving spouse just as they had planned.
 
But second marriages (after divorce or death of the first spouse) are different. There may be his children, her children and sometimes their children. Each spouse probably has assets they brought into this marriage, and they will want those to go to their own children after they die. At the same time, they will probably want to make sure the surviving spouse will have enough to live on. The estate planning methods relied upon in the first marriage probably will not work.
 
There are similar problems with beneficiary designations. Many people name their spouse as beneficiary of their life insurance, IRAs and other tax-deferred plans to provide for their spouse should they die first. But this can be a problem with second marriages because the spouse-beneficiary can name anyone he/she wants as new beneficiaries or to inherit the proceeds, bypassing the owner’s children. Promises may be made now to include them, but promises can be broken after one spouse is gone.
 
If each has considerable assets, it may be wise keep the assets and estate planning separate. If there will be a pre- or post-nuptial agreement, it should be reviewed by an estate planning attorney.
 
If one spouse has considerably fewer assets than the other, it is possible to provide for this spouse until death or remarriage, then have the remaining assets distributed to the children of the “wealthier” spouse. This is often accomplished through a life estate or QTIP trust.
 
Naming a trust as beneficiary for life insurance policies and tax-deferred plans is often a good choice for second marriages. This will allow the owner-spouse to keep control over how and to whom the proceeds are distributed. The surviving spouse can receive lifetime income, yet the owner-spouse can keep control (through the trust) over the rest of the proceeds. Keeping the proceeds in a trust will also protect them from irresponsible spending, creditors, predators, divorce, remarriage and even estate taxes, if done properly.
 
Be sure to include planning for disability and long-term care. If one spouse becomes ill and Medicaid assistance is needed, the combined assets of the couple will be considered “available assets” to pay for the care of the ill spouse. Long-term care insurance may be needed to protect the assets of one or both spouses.

One area that is often overlooked in the divorce process is the need to update estate planning. Most people would agree that their ex-spouse is the last person they want to inherit their assets when they die—or to have that person make life and death decisions for them. But that is exactly what can happen when these documents are not updated.
 
Beneficiary Designations
Assets that have beneficiary designations (e.g., life insurance policies, employer retirement plans, IRAs, annuities, health savings accounts, investment accounts and some bank accounts) are not controlled by a will or trust. Instead they will be paid directly to the person listed as beneficiary (unless that person is deceased, is a minor, or is incapacitated when the insured dies). Because most married people name their spouse as beneficiary, these should be changed right away.
 
Children and Other Beneficiaries
If you name children as beneficiaries and they are minors when you die, a court guardianship must be established for them until they become age 18—at which time they will receive the entire inheritance. Until then, the other parent (your ex-spouse) could be named by the court to manage the funds. Naming another individual (for example, your parent or sibling) as beneficiary with the understanding they will use the money to care for your children until they are older is also risky. You have no guarantee they will follow your instructions, they may be tempted to use the money for their own needs, and the money would be exposed to their creditors.
 
Naming a trust as the beneficiary instead and selecting your own trustee (which may still be your parent or sibling) is a much better choice. A trustee can be held liable if he/she misuses the trust assets. An ex-spouse can be prevented from having access to the money, and you can control when your children will inherit. Money that stays in the trust is protected from irresponsible spending, creditors, and even spouses. For all these reasons, a trust is an excellent choice as beneficiary instead of an individual, regardless of his/her age.
 
Your Will and/or Living Trust
If you do not update your will or trust, your ex-spouse may inherit your assets. And if he/she remarries, the new spouse and his/her children could inherit your assets, leaving your children and family with nothing.
 
If you have minor children, you need to name a guardian for them in your will. (Even if you have a living trust, a simple will is required to name a guardian and to direct any forgotten assets into your trust.) Upon the death of one parent, usually the surviving parent will become the sole guardian. But if your ex-spouse has also died, had his/her parental rights terminated, or becomes an unfit parent, the court would have to appoint a guardian and would appreciate knowing your choice.
 
Powers of Attorney
Most married couples give each other the power to make health care decisions, including those regarding life and death. Financial powers are also usually given to each other so that one can manage the other’s financial affairs without interruption. These are often quite broad, including the ability to buy and sell real estate, open and close financial accounts, change beneficiary designations, collect government benefits, etc. Instead of your ex-spouse, you can name a parent, sibling, close friend or adult child to have these powers and act for you when you cannot.

Once a child turns 18, parents lose the legal ability to make decisions for their child or even to find out basic information. Learning you cannot see your college student’s grades without his/her permission can be mildly frustrating. But a medical emergency can take this frustration to a completely different level.
 
The following legal documents allow anyone, including a young adult, to name another person to make medical and financial decisions if someone is unable to make them for themself. The person(s) selected should be someone the young adult knows and trusts, and a candid discussion should occur now so they know what their wishes would be. These documents are not expensive, and everyone over the age of 18 should have them.
 
Parents may want to set an appointment with their attorney after each child’s 18th birthday and encourage other parents to do the same for their young adults. Having these documents in place does not mean anyone expects to use them, but everyone will be glad to have them should they be needed.
 
In the Event of Incapacity

• A Medical Power of Attorney gives another person legal authority to make health care decisions (including life and death decisions) if you are unable to make them for yourself.
• A Durable Power of Attorney gives another person legal authority to manage your assets without court interference. Your attorney can write it in such a way that it does not go into effect until you become incapacitated.
• HIPPA Authorizations give your doctors permission to discuss your medical situation with others, including family members and other loved ones.

In the Event of Death

• Most young adults do not have substantial assets, so a simple will is probably all that is needed at this time. It will let the young adult designate who should receive his/her assets and belongings in the event of death.

For many, passing along religious beliefs and values to the next generation is just as important as passing along financial wealth and tangible assets. Estate planning creates many opportunities to do this, including:
 
End-of-Life Care. A Medical Power of Attorney lets you name someone to make medical decisions for you in the event you cannot make them yourself. This can be someone who shares your faith and values about end-of-life issues or someone who will honor your wishes. In either case, it is a good idea to provide written instructions about things like organ donation, pain medication, hospice arrangements, even avoiding care in a specific facility. A visit by your minister, priest, rabbi or other member of clergy may be desired.
 
Funeral and Burial Arrangements. Faith can influence views on burial, cremation, autopsy, even embalming. Faith may also influence certain details in a funeral or memorial service. Some people pre-plan their services and include a list of people to notify (which can be helpful for a grieving family). Some even pre-pay for the funeral and burial plots to prevent their loved ones from overspending out of grief or guilt.
 
Charitable Giving. Giving to others who are less fortunate is common among people of all faiths. Making final distributions to a church or synagogue, university, hospital and other favorite causes will convey the value of charitable giving to family members.
 
Distributions to Children and Grandchildren. Taking the time to plan how assets are left to family members is another way to convey faith values. Parents of young children can select someone who shares their religious views to manage the inheritance. A letter of instruction to the guardian can include views on the care and upbringing of young children, which are often influenced by faith.
 
Transferring faith and values to family members is best done over time, by letting them see your faith at work in your life, taking them to religious services, and letting them see you being charitable. But it is never too late. Talk to your family while you can. Explain what your faith means to you and how it has helped you through difficult moments in your life. You can also write personal letters or make a video that they can keep and review long after you are gone.

The main reasons most people have life insurance are to pay final expenses (medical, funeral, burial, etc.), replace an income stream and/or create wealth for our dependents after we die. Life insurance can also play an important role in business, estate planning and charitable giving.
 
When considering whether or not you need life insurance, think about what would happen to your loved ones if you should die today. Most people would agree if you have children (babies through college age) you need life insurance, but those who depend on us financially may also include our spouse, aging parents, siblings, and other family members with special needs.
 
Young Single Adults
If you have no dependents, you may only need enough life insurance to pay your final expenses and debt so your family will not have that burden. However, if you help support an elderly parent or another person, life insurance can replace that financial support.
 
Married with No Children
At this point, both partners are probably working. If one should die unexpectedly, one income may not be enough. Life insurance can provide cash to pay final expenses, pay down credit cards and other loans, and help with mortgage payments and ongoing monthly expenses—at least until the survivor can make lifestyle adjustments. Again, if you are thinking about having children in the future, it’s not too early to buy life insurance.
 
Married with Dependent Children
Adding kids to the scenario multiplies our financial obligations. In addition to final and regular ongoing expenses, life insurance can pay off a mortgage, fund college educations and provide for the surviving spouse’s retirement, easing the financial burden on the surviving parent and even allowing a stay-at-home parent to remain at home with the children. If a stay-at-home spouse should die while the children are young, life insurance can provide the funds to hire someone to help with child care, shopping, cooking, transportation, cleaning, and other household responsibilities. At this stage, it makes sense to have life insurance on both parents.
 
Single Parents
Single parents already have the work and responsibilities of two people. Life insurance can provide the financial protection and security your family would need.
 
Business Owners
Business partners often have buy-sell agreements that are funded with life insurance; when one dies, the proceeds can be used to buy the other’s share of the business from the deceased owner’s family. “Key man” insurance can be purchased on the life of an employee or partner whose role in sales or management is very valuable to the business; if this person dies, money would be available to help keep the business going while a replacement is found. Life insurance can also create an inheritance for all children, including those not working in the family business.
 
Empty Nesters and Retirees
Life insurance can help provide for the surviving spouse’s retirement and potential medical and long-term care expenses. Existing and new life insurance policies can also be used to make charitable gifts, and to fund private foundations and trusts for future generations. Life insurance can also pay estate taxes, preserving the rest of the estate for family members.