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Beneficiary designation errors could derail your estate plan

When creating your estate plan, you may have several different types of accounts to which you may name a beneficiary. The funds in those accounts will pass directly to your beneficiary or beneficiaries without having to go through probate.

These accounts may include bank accounts, investment accounts, retirement accounts or life insurance policies, among other things, whether located here in Pennsylvania or elsewhere. If you fail to properly designate beneficiaries for these accounts, the plans you made regarding your estate could fall apart.

Are your beneficiaries up to date?

You may be under the impression that once you designate both a primary and contingent beneficiary that you have nothing else to do. What happens if you outlive your primary beneficiary? What can you do if you have a falling out? You may find it beneficial to review your beneficiary designations periodically to make sure they still meet with your wishes. Moreover, when you experience a major life change, you may want to review them as well.

This is vital because changing a will or trust has no effect on accounts that require beneficiary designations. Your expressed designation on these accounts overrides your will or trust.

Did you make your adult child a co-owner of your bank account?

This may make sense since your child would have immediate access to the funds in the account upon your death. In reality, your child has access to the account immediately, as in the day you put him or her on the account. This may cause the following issues:

  • If your child divorces, files bankruptcy or becomes the subject of a lawsuit, the account may be attached for payment to creditors. You could lose at least half of the money in your account.
  • When your child becomes a co-owner of the account, you may incur liability for gift tax if half of the amount of the account exceeds the $15,000 per year gifting limit. The IRS considers the addition of your child to the account as a gift.
  • You may intend for your child to use the money in your account for funeral and burial expenses or your last medical bills, but once you pass away, the money belongs to him or her. Legally, your child is not obligated to follow your wishes.
  • You may intend for your child never to use any of the funds in the account during your lifetime, but legally, he or she owns half the account and may do so at any time.

If you wish for your adult child to have access to your account should you become incapacitated, it may be better to use a power of attorney instead. In addition, you may want to consider executing a "payable on death" form with your bank, which will give your child immediate access to the funds without the account going through probate.

These are just two of the ways that beneficiary designation mistakes can affect your estate plan. If you have other concerns, you may benefit from a thorough evaluation of your situation to determine the course of action that will best serve your needs and wishes.

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