Potential Pitfalls of Life Insurance and Retirement Accounts

When creating an estate plan, several documents and decisions are involved. An important decision is to decide which assets are being held by the trust and what assets aren’t being held in the trust. Retirement accounts and life insurance are generally not in the trust.  Retirement accounts can’t be, and life insurance is generally not owned by the trust. Both pay to a beneficiary, which may or may not be the trust.  Failing to designate a beneficiary, or failing to make sure your beneficiaries are accurate and updated,  can have severe negative consequences. 

If there is no one named as a beneficiary, the life insurance or other account will typically end up in probate court.  This is expensive and time consuming, and easily avoided.  Often the surviving spouse will be named as primary beneficiary, but if the spouse does not survive and there is no contingent beneficiary named, the matter is back in probate court.

 If minor children are named as contingent beneficiaries and they are still minors when their parents die, then someone has to go to court to get appointed as a guardian of the estate, with attendant legal and accounting costs. This can cost close to $20,000 just to get in place.  Every two years the guardian has to account to the court, with accounting and legal fees incurred.

Additionally, and potentially more important, the minor gets all of the money and assets when they turns 18! This can be disastrous. Generally it is not a great idea for an 18 year old to suddenly have access to large amounts of funds.  If instead the proceeds go to the trust, these costs can be avoided, and an adult can remain between the children and the money until the children are old enough to handle their own financial affairs.

In my office, when we create or update estate planning documents, an integral part of the process is having the clients check their beneficiary designations, making sure that they are up to date, and that they accomplish the purposes of the estate plan. We want to make sure that the investment or insurance company has the beneficiary designations correct.   I have had companies lose beneficiary designations, with disastrous results for the intended beneficiaries, so I ask clients to get confirmation from the company of the current beneficiary designations so that we are sure that the company has it right.