Lamb Insurance Services

Avoid Mistakes with Important Legal Forms

Many individuals have wills prepared, put their copies of the will away, and don’t think about their estate plan again. However, they should review their estate plan from time to time to make sure that their will and other legal documents, such as beneficiary designation forms and trusts, comport with their overall estate plan and goals.

Sharon Kovacs Gruer, Esq.

Sharon Kovacs Gruer, Esq.

With retirement accounts often comprising a large portion of a person’s assets these days, a beneficiary designation form can be just as important, or even more important, than a will. Beneficiary designation forms for retirement accounts may sometimes involve the transfer of an amount of money that exceeds the total sum of the assets covered by the will. Some people do not fill in the beneficiary designation forms for their retirement accounts, assuming that these accounts will then go to the beneficiaries of their estate pursuant to their will. If there is no designated beneficiary listed on a beneficiary designation form, an IRA would usually go to the estate by the default provisions of the IRA custodial agreement, but in a much less tax efficient manner than if there had been beneficiaries listed. For instance, designated individual beneficiaries of an IRA have the ability to take out their minimum distributions over their own life expectancy pursuant to the IRS tables. If there are no designated beneficiaries, depending on the age of the account holder at death, the proceeds may have to be paid out over five years, or over the period that the IRS considers to be remaining life expectancy of the deceased account holder pursuant to IRS tables. What that means is that the ultimate beneficiaries must withdraw more each year, and over a shorter period, than they would have had to take out if an individual had been listed as beneficiary, and this means that the ultimate beneficiaries would pay more income taxes on the distributions, and have a smaller amount grow tax deferred. Therefore, it is usually preferable to list both primary and contingent beneficiaries directly on the beneficiary designation form.

If a minor is a beneficiary of all or part of an IRA or of life insurance, it is usually best to list a trust for that minor as beneficiary of that minor’s share on the beneficiary designation form. Otherwise, after the death of the account holder, it might become necessary for someone to commence a court proceeding (with the attendant fees and delays) to be able to collect the assets on behalf of the minor. If a trust is a beneficiary of all or part of a retirement account, the trust should be listed on the beneficiary designation form.

If a beneficiary is receiving public benefits, or is likely to need public benefits in the future, it may be advisable to have a supplemental needs trust created for that beneficiary, and list the trust on the beneficiary designation form for the share of your retirement accounts, life insurance and other assets that have beneficiary designation forms that you intend to leave to that beneficiary. Also, you should make sure that your will references the trust to hold that beneficiary’s share of your probate estate.

When a trust is listed as a beneficiary of a retirement account, it is best to review the trust to make sure that it meets the IRS requirements to permit the minimum distributions to be able to be “stretched” out and paid over the life expectancy of the beneficiary of the trust. If the IRS requirements are not met, then instead of being able to “stretch” the minimum distributions over the life expectancy of the beneficiary, depending on the age of the account holder at the time of death, the IRS would require that the retirement account be liquidated over five years or over the life expectancy of the deceased account holder.

Because of all the mergers and acquisitions of financial institutions these days, the financial institution’s copy of the beneficiary designation form may not be available after the account holder’s death. A bank may have taken over another bank and may not have all of the prior bank’s records. The bank may have no record whatsoever of the completed and signed beneficiary designation form, and may advise the family that there was no such beneficiary designation form on file. Without a designated beneficiary, the “stretch” of the minimum distributions could be lost. For that reason, it is a good idea to obtain a date-stamped copy of the completed form which is on file with the bank or other institution, and keep that stamped copy in a safe place, so your family has proof of what was provided to the institution.

Another common issue is that many people execute a health care proxy naming an agent to handle their medical care if they cannot do so, but they neglect to have an open and candid discussion with the person they nominate as agent about their end of life wishes. Since the agent would be the one to make such decisions if you cannot communicate, it would be prudent to let the agent know your wishes, and make sure that he or she is willing and able to carry them out. Sometimes a family member has a religious or other objection to the principal’s wishes and would not carry out the wishes of the principal. If you have the conversation with the agent, you would hopefully become aware of such an issue, and may want to choose a different agent. However, if there is no communication, you may not realize that your agent would not carry out your wishes. It is also a good idea to discuss your wishes with the rest of your family, not only your agent, to minimize later discord.

We have seen people who have set up supplemental needs trusts for their children or other beneficiary who receives public benefits, but who have not coordinated their estate plan to ensure that all the assets they intend to bequeath to the beneficiary would go to the supplemental needs trust. Some may have accounts that are “payable on death” (“p/o/d”) or “transfer on death” (“t/o/d”) to the beneficiary, which mean that upon their death, the accounts would be distributed directly to the beneficiary, and not to the supplemental needs trust. This could adversely affect the beneficiary’s public benefits. Reviewing how accounts are titled, and updating or changing that where necessary, is an important part of estate planning.

Some people have a beautifully drawn revocable trust to avoid probate, but they never fund the revocable trust. If assets are not properly transferred into the trust and are held in your own name alone, the assets may need to go through probate. It is important to make a list of your assets and then transfer the appropriate assets (but not any retirement accounts) to the revocable trust to avoid or minimize probate.

We have also seen situations where people have had irrevocable trusts prepared for asset protection purposes, for example, to protect a co-op, but then never transferred their co-op shares into the trust. If the shares are not transferred into the trust, then the trust provisions do not govern the co-op shares. It is important to have the correct trusts prepared, but just as much care should be taken to make sure that the trusts are properly funded and that the assets are titled correctly.

One should look at the will, trusts, asset list, how the assets are titled, the beneficiary designation forms and other legal documents to make sure that the estate plan is integrated, that all the documents work together, and provide for the results that one wants to achieve.

Sharon Kovacs Gruer, with offices in Great Neck, focuses her law practice in the areas of estate planning, elder law, special needs trusts, guardianships, tax law and asset protection. Ms. Gruer holds a master of law in taxation (LL.M.) from New York University, is certified as an elder law attorney by the American Bar Association’s accredited National Elder Law Foundation, is a past chairperson of the Elder Law Section of the New York State Bar Association, past president of the Great Neck Lawyers Association, and past chairperson of the Nassau County Bar Association Taxation Committee. Ms. Gruer has practiced law for thirty years. The firm’s website is www.nytrustlaw.com, and phone number is 516-487-5400.

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