Many people wonder, what are beneficiaries. They also wonder why, even though the will or trust names them as beneficiaries, they get nothing. The reasons are surprising.
The definition of beneficiary is someone who is entitled to receive some kind of benefit. In life insurance, the beneficiary receives the proceeds of the policy when the insured dies. In retirement plans, the beneficiary receives the proceeds of the IRA, 401(k) or pension when the Participant dies. When it comes to will and trust beneficiaries, the rules change.
Last Will and Testament
A Last Will and Testament is written to give assets to loved ones upon death. In order to administer a Last Will and Testament, it has to be presented to the court and approved. Once it is approved, the Last Will and Testament is entered into probate and a Personal Representative (PR) is appointed. It is the PR’s job to collect assets, pay bills and then give what’s left to the beneficiaries.
There’s the rub. If the PR collects the assets and pays the bills, there may not be anything left over for the beneficiaries. Also, if all of the assets pass to other people outside of the Last Will and Testament, the beneficiaries of the Will, get nothing.
So, let’s say Dad A dies and leaves everything in his Last Will and Testament to Daughter B. It is perfectly clear that Daughter B will get everything and no one contests the process. How much does Daughter B get? Daughter B may get nothing.
Why? Because Dad A was married to Stepmom C. All of Dad A’s assets were owned jointly with Stepmom C. Owned jointly means, if Dad A dies first, everything goes to Stepmom C. Joint ownership means 2 people own an asset together, like a house or a bank account. When one dies, everything passes to the survivor. Bingo—daughter gets nothing.
Even though the Last Will and Testament says everything to Daughter B, there is nothing left for Daughter B to inherit.
The same problems arise with Trusts. Trusts don’t have to go to court to work. The Trustee of the Trust does everything that a PR does, only without a court order. The process stays in the family.
Trusts are like boxes which hold on to assets. They are created while you are alive, and the object of the Trust is to own all your non-retirement assets during lifetime. When you die, the assets pass to the Trust beneficiaries.
Once again, this sounds pretty simple. But Trusts work much like Last Wills and Testament, just without going to court. Even if the Trust says, everything goes to Daughter A, if the assets are jointly owned by Dad A and Stepmom C, Stepmom C gets everything.
Another interesting problem with Trusts is that many Trusts first give assets to surviving spouse, before anything passes to the children. So, if Dad A makes Stepmom C first beneficiary of the Trust, Stepmom C can use it all, leaving nothing for Daughter B. 100% of nothing is still nothing.
A Better Way
A better way to handle this situation is to go to a qualified estate planning attorney and tell the attorney that you want some assets to pass to your spouse, but you want to make sure that your children are not left out. The estate planning attorney will draft your Last Will and Testament and Trust to make certain that happens.
But don’t try to make an end run around the planning. You can have the best estate plan in the world, but you need to listen to the attorney when she tells you which assets go into the Trust and which assets are controlled differently. So there is really two important parts of estate planning. The first is to get the documents prepared. The second is to make certain that no matter what happens, Daughter B, will still receive her inheritance.
The painful fallout which occurs when the estate plan and assets are not coordinated, is the biggest problem in estate planning today. What are beneficiaries should be, the correct people receive what Dad A wanted them to inherit. Without this, Daughter B will spend the rest of her life grieving her beloved Dad. She will also feel the anger and the pain of being left behind. Sadly, this is the norm.
Estate planning which is not well done, or not done at all leads to lawsuits. People will sue each other over not receiving their inheritance. Dad said this, or grandma said that won’t work once they are gone. A Last Will and Testament and a Trust are very complicated documents which much be drafted in just the right way.
Otherwise the law of default, also called the law of intestacy, rules the day. No one ever wants to leave their assets via the law of intestacy. Families are furious when they are told they have no choice. This is it. The law has to take care of the 90% of the people who do no estate planning at all. If you don’t decide for yourself, the law will decide for you. It must, but you won’t be happy about it.
When people are unhappy, they sue each other.
Do you want to take care of your loved ones?