Posts Tagged ‘revocable living trusts’

News Flash: Beneficiary designations are a Big Deal

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Grove Thoughts

Use Care: Beneficiary Designations Trump Your Will or Trust.

Always a good thing to meet with your investment adviser and have your insurance coverage and investments properly aligned to meet your needs.   However… Some times …  after all that planning … the act of filling out your beneficiary designation forms might seem like an afterthought.

As mundane as the beneficiary designation process may seem, it is important to keep in mind that the beneficiary designation form on file with the company will control ownership and distribution of the life insurance policy/individual retirement plan after you die: Not your will or your trust.

Example: If you have a life insurance policy for $100,000.00 and you name your son Mickey under the beneficiary form, Mickey gets the cash on your death. If you also named Minnie to receive your assets under your will, she sees none of that money.

Knowing that the designation trumps the Will or Trust, great care should be used when filling the beneficiary designation form out.

The Change Forms the Companies offer are not always understandable or helpful.

The insurance companies and IRA custodians have pre-printed beneficiary designation forms that they make you use. Keeps them out of hot water because they are a consistent element of their operations, which leads to fewer mistakes when the time comes to process them.   They are (for the most part) constructed to fit the company’s processing needs but can sometimes fall short when they are being used to meet your goals. This is because sometimes the company’s processing needs are not lined up with your wishes.

Ask yourself some questions when filling out these forms.

What happens if one of my beneficiaries dies before I do?

One of the biggest surprises for unwary clients is that so many of the forms default to the “survivorship rule”. These forms with the survivorship rule in them divide a predeceased beneficiary’s share equally among the surviving beneficiaries. This “survivor takes all” result works for some people, but not most people. For example, some folks would like to see a grandchild take a predeceased child’s share rather than leave the grandchild out by having the proceeds split only between the children lucky enough to survive them.

If the survivorship rule is not what I am looking for, what are some alternates available?

So now we enter into the world of Latin phrases. But … do not worry. These are not as hard to grasp as it might seem. There are two main phrases to remember: “by right of representation, per stirpes” and “by right of representation, per capita”. The term “per stirpes” means by root or branch, while the term “per capita” means by head.

Per stirpes: Per stirpes is the most popular of these two alternatives. Per stirpes boils down to meaning that the percentage planned for one beneficiary that predeceases goes to the deceased beneficiary’s heirs by blood: Often their children or grandchildren.

Example: If your son Mickey was entitled to 50%, but died before you did, his two surviving kids (your grandkids), Tammy and Timmy would each take 25 %. Your surviving daughter, Minnie is entitled to the other 50%.

Per capita:  Per capita is the rarest of these two alternatives. Per capita boils down to meaning that the percentage planned for one beneficiary that predeceases is ignored. Instead the deceased beneficiary’s heirs by blood: Often the decease beneficiary’s children, step up onto the same level as you children.

Example: Your son Mickey was entitled to 50%, but died before you did and your surviving daughter, Minnie was entitled to the other 50%. Mickey had the two kids Tammy and Timmy. Tammy and Timmy step up on the same level as Minnie. That means Minnie, Tammy and Timmy would each receive 33 1/3%.

What most people want is a per stirpes distribution at death vs. the survivorship rule or a Per capita distribution.

What happens if I run out of listed beneficiaries?

The answer here can be found on the form but also may be in the policy or contract itself. Some companies default to have the proceeds paid to your estate, while some set your spouse, children and/or parents as beneficiaries if you run out or fail to name any beneficiaries.  Definitely get this question answered.

What to do.

Be sure to read the default provisions in your beneficiary designation forms. You need to know what they say so that you can make any appropriate changes to them.  Customize your designation if you have to do so. In many cases, the beneficiary designation forms can be customized to meet your wishes by adding and addendum (attachment) to it spelling out your intended desires.

Know that is ok to seek help too. A qualified estate planner can help you spot issues and help you to modify the beneficiary designation form so that it aligns with your wishes.

Trusts: How Do I Ascertain the Ascertainable?

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We draft revocable living trusts on a regular basis here at Shannon Law. The trust planning and development process normally involves three fairly lengthy meetings. We prefer to spend this much time on our estate planning projects because we feel that it is critical that clients have an ample opportunity to ask questions during the meetings and to make sure the final trust plan meets the needs of our clients.

We do tend to receive some questions on a regular basis during the meetings. One consistent question we receive when covering trusts concerns certain very common distribution language found in nearly every revocable living trust on the planet. The question is normally posed like this: What is this line saying that the trust will pay money out to beneficiaries for “support, maintenance, education, and health” really mean? Let us make an attempt to cover that.

The trust laws state that standards of distribution set forth in a trust must be “ascertainable.” In other words, the standards must be clearly measurable. Some of the commonly accepted “ascertainable” standards include support, maintenance, education, and health. Other “ascertainable” standards may include comfort, best interest, and emergency.

Here is a brief explanation of how some of these standards may be interpreted by a trustee and the courts:

Support and Maintenance. Support and maintenance incorporate more than bare necessities. These terms include a beneficiary’s normal living expenses, such as housing, clothing, food, and medical care, according to the beneficiary’s customary standard of living.

Best Interests. Under the less restrictive standard of best interests, the trustee may make distributions allowing a beneficiary to enjoy a high standard of living, covering such niceties as extensive travel, a luxury automobile, or expensive jewelry.

Education. Typically, the term education includes a college or tech school education, but may not necessarily include graduate-level or a professional education unless specified. A client wishing to provide for a grandchild’s pursuit of a medical degree, for example, should communicate those desires when the trust agreement is being drafted. Considerations like travel expenses to and from school and a reasonable allowance for related expenses also should be clarified in the trust document, if so desired.

Health. The term health includes all routine medical care, medication, surgery, and hospitalization, as well as nursing care and mental health expenses. This term is less restrictive than “medical care,” which may not cover expenses for treatment of ailments not universally accepted as medical problems, such as addictions or psychological problems.

Emergency. The term emergency may be determined by a court to be an ascertainable standard pertaining to unusual and unforeseen expenses, but may not be deemed an ascertainable standard by the IRS for tax purposes. To minimize confusion, the client may wish to specify the types of emergencies for which distributions are authorized, such as financial emergencies or those related only to health or maintenance.

While many factors determine the level of access beneficiaries will have to trust assets, understanding the difference between, and nuances of, the “ascertainable” standards named above will go a long way toward helping you communicate your wishes. Ultimately, choosing the provisions for distributions is a balancing act, with tax consequences on one side of the scale and the wishes of the grantor on the other side.

The above discussion is brief and does not do proper homage to the complexity of the standards mentioned. We encourage you, when working on your trust, to spend time discussing what this language means and make sure it meets your objectives. Seeking the counsel of a qualified estate planning attorney is the next step in ensuring beneficiaries are cared for according to your wishes.