Estate planning professionals generally agree that developing the plan — writing the will, signing the trust documents, drafting a healthcare power of attorney — is the first step, not the only step, toward ensuring your wishes are followed when you die or if you become incapacitated. Every person should have some kind of plan, and every person should review his or her plan annually.
The review is important for a few reasons. First, life happens. You may have a falling out with your brother that convinces you he is not the right person to raise your children if something happens to you. Your mother may pass away, so you will need to name a new personal representative. You might have a child, so you might want to buy more life insurance.
Of all the items that should be reviewed, perhaps the most often overlooked items are beneficiary designations. Life insurance policy payouts, for example, bypass probate and go straight to the beneficiary. If you don’t name a beneficiary, or if your named beneficiary has died, the payout could roll into your estate — your taxable estate that is available to creditors.
The policy itself may designate your surviving spouse as your default beneficiary, of course, but no one should count on that being the case. The same applies to 401(k) and IRA accounts: The contract may include some contingency distribution plan if no beneficiary is named, but the money could still end up taxable, available to creditors or both. The objective of these accounts is to maximize your assets for your heirs. Not naming a beneficiary is a sure way to mess that up.
We’ll continue this in our next post.