The “simple” solutions in estate planning can often turn into complex and expensive situations upon a person’s death or disability. People always want to find the easiest, fastest and cheapest solution to a problem. I think to a certain extent, technology has been the reason we are in this situation. If we want to watch something, we look it up on YouTube, and bam, it’s right there. If we want a new shirt, or need a certain part to fix our cars, we look it up on Amazon, and there it is on our doorstep the next day, sometimes even on the same day. All of these wonderful fast solutions are creating a “gotta be fast” mentality for everything. Unfortunately with legal affairs such as estate planning, it’s not always the best approach.
The most common “simple” solution is the idea that people don’t need a Will or Trust because they already have beneficiary designations on their life insurance, retirement accounts, savings accounts and pension plans. It’s true that the people designated on such accounts will be able to access the funds upon death without going through probate. However, there are several pitfalls to this “simple” plan, as a will lawyer Schaumburg, IL trusts can explain to you in detail.
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Young Beneficiaries – Often, a young couple will choose their spouse as primary beneficiaries, and then their minor children as secondary beneficiaries. If the account holder dies when the children are still minors, the children will receive the funds at age 18. What if that child is ill-equipped to be able to handle such funds responsibly? A client told me that it happened to their nephew. His mother unexpected died, and he received $500K at age 18. The nephew did not go to college and he spent the money within 3 years. He is now age 32, and regrets the unwise decisions he made with the inheritance. Now he understands the power of compound interest, and if he had invested the $500K at age 18, he would have had a nice size retirement fund at the age of 32.
Inadvertent In-Law Beneficiaries – This “simple” solution of designating your children as beneficiaries can have an unintended effect. Mom dies, and she leaves her largest asset, her IRA, to her only son, who is married, and has two kids. So, yes, the IRA does transfer to her son, easily and quickly upon Mom’s death. Unfortunately, son dies two years later. He named his wife as primary beneficiary. The surviving spouse now owns Mom’s largest asset that Mom worked very hard for. Daughter in law meets husband #2, and she spends the money with him. Mom’s two grandchildren do not see a penny of Mom’s hard-earned IRA money. People often say, “oh no, that would never happen.” There are no guarantees in life. There is no way of knowing who goes first, and whether people will do the “right thing.”
Disinheriting Grandchildren – Let’s go back to the same example, mom is single, and she names her two sons as beneficiaries to her IRA. Each child has 2 children of their own, so mom has 4 grandchildren total. Her son unexpectedly dies at the age of 40. She is of course distraught, not thinking of her own affairs. She dies a year later. Her IRA names her two sons as beneficiaries. It’s possible that 100% of the IRA will go to the surviving son. Her two grandchildren under her predeceased son essentially are disinherited from her estate, which is probably not her original intention.
Often people say that these examples are remote, that they will not happen to “their family.” It’s always better to be safe than sorry. No one has a crystal ball showing them their future. It’s important to protect our families so they receive our hard-earned assets appropriately, and responsibly.
Thank you to our friends and contributors at Bott & Associates for their insight into estate planning and IRA beneficiaries.
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