No one looks forward to the process of planning how assets will pass at death. But it’s important to understand that the planning is not finished just because you signed that Will, Power of Attorney, and Living Will. You also need to review your retirement and life insurance beneficiary designations and the titling of your assets.
This review is critical since your Will only controls the assets that pass through the probate process. Non-probate assets, however, include retirement accounts like IRAs, 401(k) and 403(b) accounts, life insurance policies, accounts owned as joint tenants with right of survivorship (JTWROS) and accounts designated as Transfer on Death (TOD). These types of assets pass by operation of law, so that at the death of the account owner or the insured, the life insurance proceeds or account assets can be transferred to the named beneficiary (or joint owner) with only a death certificate. In other words, your carefully thought-out Will has no bearing on the disposition of these assets at your death.
Inaccurate beneficiary designations can disrupt an otherwise thoughtful estate plan.
Inaccurate beneficiary designations can easily disrupt an otherwise thoughtful estate plan. One common issue arises when the primary beneficiary predeceases the account owner and no contingent beneficiary is named. In that case, the assets could be payable to the account owner’s estate, which may have significant tax consequences. Additionally, if a named spouse beneficiary is not changed after a divorce, that divorced spouse could receive the assets. Since retirement accounts are often an individual’s largest single asset, it is important to review these designations and be sure they are coordinated with your overall estate plan.
When titling assets in joint names, be aware of unintended consequences. For instance, a parent who relies on a child for caregiving might add that child to his or her account as a joint owner in order to facilitate paying bills. However, by adding the child to the account, the funds in the account are considered to belong to both the parent and that child, even if the child never contributes any funds to the account. At the death of the parent, the entire account will transfer to the child by operation of law as the surviving joint account holder, regardless of what your Will says. Under certain circumstances, this might not be problematic, but if the intention was for the parent to divide assets equally among his or her children, that objective has now been thwarted. Also, adding anyone other than a spouse to a joint account could trigger a federal gift tax issue, depending on withdrawals from the account. If a parent needs a child’s help with bill paying and other financial matters, naming the child as agent under a power of attorney can avoid these unintended consequences.
Issues can also arise when using TOD accounts. For these accounts, the named beneficiary does not have access to the account until the passing of the account owner. But if a parent designates a minor child to receive the assets upon his or her death and dies while the child is still a minor, a guardianship may need to be established to permit use of the account for the minor’s benefit. Accounts titled as TOD may also be problematic if the account owner dies and there are no other assets with which to pay legal expenses, funeral bills, or taxes. In this instance, the creditors may be able to attach the account that was titled as TOD, and then go after the beneficiary for these expenses. The successful implementation of an estate plan requires the coordination of your Will, beneficiary designations, and account titling. Please contact your Pennsylvania Trust account officer for assistance.
Aaron H. Fox, Esq. is Senior Vice President, Trust and Account Administration at Pennsylvania Trust.