New York Estate Planning & Elder Law

States with the Best Tax Rates for Retirees / New York, NY & Greenwich, CT

“The Tax Cuts and Jobs Act raised the federal estate tax exemption considerably. Before the tax reform law, it was $5.49 million per person for 2017. It's up to $11.7 million for 2021 ($23.4 million for a married couple).”

For the moment, fewer Americans are concerned about the federal estate tax. However, if your goal is to leave as much as possible to heirs, then it’s wise to consider all the taxes of the state you choose for retirement. That’s all detailed in the article “33 States with No Estate Taxes or Inheritance Taxes” from Kiplinger.

Twelve states and the District of Columbia have their own estate taxes, which some call “death taxes.” Their exemption levels are far lower than the federal government’s. There are also six states with inheritance taxes, where heirs pay taxes based on their relationship to the deceased. Maryland has both: an estate tax and an inheritance tax.

The most tax friendly states of all are Nevada, Arizona, Wyoming, Colorado, Arkansas, Tennessee, South Carolina and Delaware. In Colorado, taxpayers 55 and older get a retirement income exclusion from state taxes that gets better when they reach 65. Colorado also has one of the lowest median tax rates and seniors may qualify for an exemption of up to 50% of the first $200,00 of property value. Colorado also has a flat income tax rate of 4.55%, and up to $24,000 of Social Security benefits, along with other retirement income, can be excluded for income tax purposes.

Next in line for retiree tax friendliness are Montana, Idaho, California, Kentucky, Virginia, Louisiana, Mississippi, Alabama, Georgia and Florida. Let’s look at the Sunshine State, which has no state income tax and also a low sales tax rate. Property taxes are low in Florida, and residents 65 and older who meet certain income, property-value and length-of-ownership standards also receive a homestead exemption of up to $50,000 from some city and county governments and meet other requirements. Social Security benefits are not taxed in Florida and the state has no income tax, making it extremely attractive to retirees.

Coming in third place with a mixed tax picture are Washington, Oregon, North Dakota, South Dakota, Utah, Oklahoma, Missouri, West Virginia, North Carolina, Maryland and the District of Columbia.  Many people are moving to North Carolina, where Social Security benefits are not taxed, but tax breaks for other kinds of retirement income are far and few between. Property taxes are low and there are no estate or inheritance taxes. State income is taxed at a flat 5.25% percent, making North Carolina competitive, when compared to high state income taxes. Then there’s Oklahoma, which doesn’t tax Social Security benefits and allows residents to exclude up to $10,000 per person ($20,000 for couples) in retirement income. However, the Sooner State has one of the highest combined state and local sales tax rates in the nation. Property taxes also fall right in the middle, when the median property taxes for all 50 states are compared.

Looking for a state to avoid when it comes to taxes? The fourth place in taxes goes to New Mexico, Minnesota, Michigan, Indiana, Ohio, Pennsylvania, Maine, New Hampshire and Massachusetts. Indiana may not tax Social Security benefits, but it taxes IRAs, 401(k) plans and private pension income. And counties are authorized to levy their own income taxes on top of the state’s flat tax. Sales and property taxes are in the middle of the road. Illinois also spares retirees from taxes on Social Security and income from most retirement plans, but property taxes are the second highest in the nation. Sales tax rates are high in Illinois as well. The state also levies an estate tax on heirs. Pennsylvania has an inheritance tax and high property taxes (the 12^th highest in the country). However, it has a flat income tax rate of 3.07%, although school districts and municipalities may levy their own taxes.

Lowest on the list for retirees seeking to minimize tax expenses are New York State, Vermont, New Jersey, Connecticut, Wisconsin, Illinois, Iowa, Nebraska, Kansas and Texas. Everyone knows about taxes in New York, New Jersey, and Connecticut, but Texas? How does a state with no income tax at all end up on the “least tax friendly for retirees” list? Texas has the seventh-highest median property tax rate in the country. There are some exemptions for retirees, but not enough to make the state tax friendly. Sales taxes are high, with the average combined state and local taxes in the state hitting 8.19%.

Taxes are not the only factor in deciding where to retire. Where you ultimately retire also should include considering where your loved ones live, what level of healthcare you need now and may need in the future and whether you want to move or remain in your community.

Reference: Kiplinger (Aug. 25, 2021) “33 States with No Estate Taxes or Inheritance Taxes”

For more information on elder law, retirement planning and estate planning, please visit my estate planning website.

Just What Does an Executor Do? / New York, NY & White Plains, NY

“In addition to deciding who gets what when you die, you have key roles to fill that deserve thoughtful deliberation as part of the estate-planning process, experts say.”

Spending the least amount of time possible contemplating your death is what most people try to do. However, one part of the estate planning process needs time and reflection: deciding who should serve in important roles, including executor. Whatever the size of your estate, the people you name have jobs that will impact your life and your family’s future, says a recent article “How to get it right when naming an executor and filling other key roles in your estate plan” from CNBC. A quick decision now might have a bad outcome later.

First, let’s look at the executor. They are responsible for everything from filing your last will with the court to paying off debts, closing accounts and making sure that assets in your probate estate are distributed according to the directions in your last will. They need to be trustworthy, organized and able to manage financial decisions. They also need to be available to handle your estate, in addition to their other responsibilities.

Note that some of your assets, including retirement tax deferred accounts, life insurance proceeds and any other assets with a named beneficiary, will pass outside of your probate estate. These assets need to be identified and the custodian needs to be notified so the heir can receive the asset.

Settling an estate takes an average of 16 months, with smaller estates being settled more quickly. Larger estates, worth more than $5 million and up, can take as long as four years to settle.

Some people prefer to name co-executors as a means of spreading out the responsibilities. That is fine, unless the two people have a history of not getting along, as is the case with many siblings. Sharing the duties sounds like a good idea, but it can lead to delays if the two don’t agree or can’t coordinate their estate tasks. Many estate planning attorneys recommend naming one person as the executor and a second as the successor executor, in case the first cannot serve or decides he or she does not want to take on the responsibilities. The same applies to any trustees if your estate plan includes a trust.

Make sure the people you are considering as executor, successor executor, trustee or successor trustee are willing to take on these roles. If there is no one in your life who can take on these tasks, an option is to name an estate planning attorney, accountant, or trust company.

Another important role in your estate plan is the Power of Attorney. You’ll want one for financial decisions and another for healthcare decisions. They can be the same person or different people. Understand that the person you name as your Power of Attorney will have complete control over your assets, including accounts, real estate, and personal property, if you are too incapacitated to make decisions or to communicate your wishes.

A Health Care Proxy or healthcare Power of Attorney will make medical decisions on your behalf if you are incapacitated. You will want to name a person you trust to carry out your wishes—even if they are not the same ones they would want, or if your family opposes your wishes. It’s not an easy task, so be sure to clearly express your wishes to your agent if you are placed on life support or suffer from a terminal condition. This will help your Health Care Proxy follow your wishes.

Finally, revisit your estate plan every three to five years. Life changes, laws change and your estate plan should continue to reflect your wishes. The lives of the people in key roles change, so the same person who was ready to serve as your executor today may not be five years from now. Confirm their willingness to serve every time you review your last will, just to be sure.

Reference: CNBC (March 5, 2021) “How to get it right when naming an executor and filling other key roles in your estate plan”

For more information on elder law, retirement planning and estate planning, please visit my estate planning website.

Social Security Benefits: Timing Is Everything / New York, NY & Greenwich, CT

“Deciding when to start receiving Social Security retirement benefits is an important decision.  Making the wrong choice could cost you.”

Not knowing when you will be eligible to receive all of the benefits earned through your work history can hurt a retirement plan, says a recent article from CNBC.com titled “Here’s what to you need to know about claiming Social Security retirement benefits.” Equally problematic? Letting fears of the program running out of money before you can get your fair share influence your decision.

If you get the timing right and use a combination of your retirement savings and Social Security benefits in the right time and the right order, your money may last as much as seven years longer. However, remember that there are many rules about Social Security and retirement fund withdrawals. Here are three big blind spots to avoid:

Not knowing when to take full benefits.

Age 62 is when you are first eligible to take Social Security benefits. Many people start taking them at this age because they don’t know better or because they have no alternative. If you start taking benefits at age 62, your monthly benefits will be reduced.

There is a difference between eligibility and Full Retirement Age, or FRA. When you reach FRA, which is usually 66 or 67, depending upon your birth year, then you are entitled to 100% of the benefits based on your work record. If you can manage without taking Social Security benefits a few more years after your FRA, those benefits will continue to grow—about 8% a year.

Most Americans simply don’t know this fact. If you can wait it out, it’s worth doing so. If you can’t, you can’t. However, the longer you can wait, the bigger the monthly check will be.

How many ways can you claim benefits?

This is where people make the biggest number of mistakes. There are many different ways to take Social Security benefits. People just don’t always know which one to choose. First, once you start receiving benefits, you have up to a year to withdraw your application. Let’s say you need to start benefits but then you find a job. You can stop taking benefits, but you have to repay all the benefits you and your family members received. This option is a one-time only event.

Another way to increase benefits if you start taking them early, is to suspend them from the time you reach your FRA until age 70. However, you have to live without the Social Security income for those years.

Expecting the worst scenarios for Social Security.

Social Security headlines come in waves, and they can be disconcerting. However, a knee-jerk reaction to take benefits early because of fear is not a good move for the long term. There are a number of proposals now on Capitol Hill to strengthen the program. Benefits may be reduced, but they will not go away entirely.

Reference: CNBC.com (Aug. 24, 2020) “Here’s what to you need to know about claiming Social Security retirement benefits”

For more information on elder law, retirement planning, and estate planning, please visit my estate planning website.

What COVID-19 Does to Roth Conversions / White Plains, NY & Greenwich, CT

“Has the Covid-19 stock market volatility caused your retirement accounts to decline? Will the temporary suspension of required minimum distributions (RMD) or a reduction in your compensation lower your 2020 tax liability?”

With a combination of lowered 2020 tax liability, the potential for future tax increases and potentially lower portfolio values, we are in uncharted financial waters. However, all of these factors may make a Roth conversion more attractive than ever, according to the article “Covid-19 and the CARES Act enhance the Roth conversion game” from the Jacksonville Business Journal.

A quick look first at essentials of the traditional and Roth IRAs:

Tradition IRA contributions are tax deductible.

• Growth inside the account is tax-deferred,
• Qualified distributions are taxed as ordinary income, and
• Required minimum distributions must begin at age 72.

Roth IRA contributions are not tax deductible.

• Growth inside the account is tax free,
• Qualified distributions are tax free, and
• There are no required minimum distributions.

Roth IRAs are an essential part of both estate and retirement planning. Converting a traditional IRA to a Roth IRA lets you decide when you or your beneficiaries pay taxes. Convert all of your IRA to a Roth, and pay the taxes up front, based on the year the conversion is made. If you have a low-income year, and the value of your IRAs is low, that’s the time to do the conversion.

Just be mindful that making this move for a large amount of money could potentially move you into a higher tax bracket. Being strategic and moving a portion of your IRA could make more sense, especially if you expect that you’ll be in a higher tax bracket during retirement, or if you anticipate that your ultimate beneficiary may be in a higher tax bracket within ten years following their inheritance. (As a result of the SECURE Act, inherited IRA accounts must be emptied within ten years after they are received.)

You’ll also need a plan to pay the taxes on that conversion. In a perfect world, those taxes would be paid from funds outside of your retirement accounts. If the only way to pay this tax is by using funds from your IRA, you can have the funds withheld during the conversion. Be sure to run the numbers before doing the conversion. If you pull money from your IRA account to do the conversion, there will be less money to grow long-term for you, and it will be included in your taxable income for the year.

We all like something for nothing, but there are costs to Roth conversions. The five-year rule requires that a Roth needs to exist for five years before you can take out money tax free. You’ll need to be sure that you have enough cash on hand to live on for five years after the conversion. However, that’s not all. There are a number of different variations on the five-year rule, depending on your situation. If you are under age 59½ and take a distribution of profits before the five years, you will get hit with a 10% penalty without an allowable exception on the amount you converted. An experienced estate planning attorney will be able to help you make a strategically sound decision.

Reference: Jacksonville Business Journal (July 13, 2020) “Covid-19 and the CARES Act enhance the Roth conversion game”

For more information on asset preservation, retirement planning, tax planning and estate planning, please visit my estate planning website.

Estate Planning and Probate Planning / White Plains, NY & New York, NY

“Probate is the court process to distribute someone's estate after their death, even if there is a will and is notoriously slow in California.”

The nature of the probate process varies from state to state, and even varies from county to county. However, the nature of the process is the same. A court has to validate a will to ensure that it meets the legal requirements of the state before assets can be distributed, explains the article “Probate workarounds can save heirs time, money” from the Baker City Herald. A typical will in some states can take nine to twelve months, and court shutdowns related to COVID-19 means that the wait could be longer. Probate is also expensive.

When does probate make sense? When a person dies with a lot of debt, probate can be helpful by limiting the amount of time creditors have to make their claims against the estate. If there’s not enough to pay everyone, the probate court makes the decision about how much each creditor gets. Without probate, creditors may surface long after assets have been distributed, and depending upon the amount owed, may sue heirs or the executor.

The court supervision provided by probate can be helpful, if there are any concerns about the instructions in the will not being carried out. However, the will and the details of the estate become public, which is bad not just for privacy reasons. If there are any greedy or litigation-happy family members, they’ll be able to see how assets were distributed. All assets, debts and costs paid by the estate are disclosed, and the court approves each distribution. This much oversight can be protective in some situations.

What’s the alternative? Some states have simplified probate for smaller estates, which can reduce the time and cost of probate. However, it varies by state. In Delaware, it is estates worth no more than $30,000, but in Seattle, small means estates valued at $275,000 or less.

These limits don’t include assets that go directly to heirs, like accounts with beneficiaries or jointly owned assets. Most retirement funds and life insurance policies have named beneficiaries. The same is often true for bank and investment accounts. Just remember not to name your estate as a beneficiary, which defeats the purpose of having a beneficiary.

Are there any other ways to avoid probate? Here’s where trusts come in. Trusts are legal documents that allow you to place your assets into ownership by the trust. A living trust takes effect while you are still alive, and you can be a trustee. Once created, property needs to be transferred into the trust, which requires managing details: changing titles and deeds and account names. This type of trust is revocable, which means you can change it any time. As a trustee, you have complete control over the property. A successor trustee is named to take over if you become incapacitated or die.

An estate planning attorney will know other legal strategies to avoid probate for part or all of your estate.

Reference: Baker City Herald (July 16, 2020) “Probate workarounds can save heirs time, money”

For more information on asset preservation, retirement planning, and estate planning, please visit my estate planning website.

When Should You Have ‘The Talk’ with Your Kids? / White Plains, NY & Greenwich, CT

“An immature or troubled child could try to misuse your money or goad you into handing over assets you might need later. Complicated family dynamics, or just your desire for privacy, may make you hesitant to open up.”

Talking about who will control your assets is always a tricky thing, says AARP.org in a recent article “Do Your Kids Know Where to Find All Your Money if Tragedy Strikes?” The risk of adult children being caught unawares or without access to a parental funds could lead to big problems if the parents should die or become incapacitated unexpectedly. Experienced estate planning attorneys know the conversation is better had now than pushed into the background with a giant surprise in the future.

When a parent’s finances are revealed only after their death, or if dementia strikes, the unexpected responsibility can create a lot of stress. However, there are also reasons not to tell. If a child has a substance abuse problem, or is in a bad marriage, this information may be best kept under wraps. There is no one-size-fits-all solution. However, there are some universal rules to consider.

Short on cash? Don’t make a secret of it. If you might end up needing help during retirement, it’s best to tell your children early on. Family members have helped each other since there were families, but the earlier you involve them, the more time they have to help you find more resources and make plans.

Dealing with big numbers? You might want to wait. The amount of money you have worked a lifetime to save may look like an endless supply to a 22-year old. When young adults learn there’s a pot of gold, things can go south, fast. If you have a spouse and are relatively young and healthy, then all the children need to know is that you are well set for retirement. By the time you’re closer to 80, your children and/or a trusted financial representative and your estate planning attorney will need to know where your money is and how to access it.

How to share the details? Start by making a complete list of all of your assets, including account numbers, key contacts and any other details your executor or agents will need to handle your affairs. Put that information into an envelope and make sure that your children or your estate planning lawyer know where it is. If the information is kept on your computer or on an online portal, make sure the right people have access to the passwords so they can access the information at the appropriate time.

How to share the big picture? Estate planning attorneys often recommend a family meeting in their offices, with all of the children present. It’s helpful to have this meeting happen in neutral territory and, even children who tend to squabble among themselves, behave better in a lawyer’s conference room. You can explain who the executor will be, and why.

Introduce them to your team. Chances are you have a long-standing relationship with your estate planning attorney, financial advisor and accountant. These are the people your children will be working with after you have passed. Having them meet before you die or become incapacitated will lead to a better working relationship during what will be a stressful time later when you are gone or unable to act in your best interest.

Reference: AARP.org (April 24, 2020) “Do Your Kids Know Where to Find All Your Money if Tragedy Strikes?”

For more information on elder law, retirement planning and estate planning, please visit my estate planning website.

Should You Cut Retirement Savings Efforts During the Pandemic? / White Plains, NY & Greenwich, CT

“Take the money you’d normally save for retirement and put it into an account for emergencies.”

As the coronavirus spreads across the US, most of our lives have come to a halt. Some Americans are already out of work and millions may end up losing their jobs during a potential recession, says CNBC in the article “Financial planner: Here’s when you should temporarily stop saving for retirement during the pandemic.” What’s the best course of action for these uncertain times?

Financial advisors typically set a goal of a small portion of household income, usually 10-15%, to be set aside for retirement. Based on your situation, now might be a time to scale that back or stop contributing to retirement accounts, if you don’t have cash savings to fall back on in the short term.

If you don’t have three to six months of emergency funds available—which most Americans do not—then now is one of the only times that the financial professionals are advising putting a temporary halt on contributing to retirement accounts.

What to do with that money? Take the money you would normally be putting aside for retirement and put it in an account for emergencies, if you are able to do so. This is not an ideal time, but hopefully it is a short-term change. Make a commitment to yourself and your retirement to start contributing once you are back on normal financial footing.

Having an emergency fund right now is critical. Legislation to help is being passed, but how much help will be available for individuals, and when it will be available, is anyone’s guess. If you or the family’s main breadwinner becomes ill and can’t work, or if your job is among those lost because of the coronavirus, having a cash cushion of any kind will be important.

Every news cycle brings more things to worry about, so having an emergency fund also can provide some peace of mind. When we are worried on a chronic basis about paying for unexpected expenses, the stress can take a toll on our physical well-being.

In addition to moving retirement funds to an emergency fund, now is the time to back off of non-essentials, like subscriptions or memberships that are not being used. Make a list of everything you are paying for that is not essential—recognizing what you and your family really need, versus what you want—and send those savings to your emergency fund. The cuts may be temporary, but they will add up faster than you expect.

The charges you are not adding to credit cards now for things like dining out, going to the movies, etc., may start showing up as smaller credit card bills. However, don’t rush to spend any discretionary income. Rather than apply that money somewhere else, like increased online shopping because you are bored, also put that extra money into your emergency fund.

These are unprecedented times, when the margin for careless spending has become very slim. Be proactive about protecting your financial well-being, so you are able to weather this storm.

Reference: CNBC (March 18, 2020) “Financial planner: Here’s when you should temporarily stop saving for retirement during the pandemic”

For more information on asset preservation, retirement planning and estate planning, please visit my estate planning website.

What Do Farmers Need to Create an Estate Plan? / Greenwich, CT & White Plains, NY

“When you are a farmer, your business is not only your livelihood and your passion, but, often, it is also intermingled with your family life.”

Planning for the end of life is intimidating for everyone, but when the plan includes a family business like a farm or ranch, things can get even more challenging. That’s why estate planning, that is, planning for the distribution of assets once you die, is especially important for aging farmers. The details are in the article “How farmers can start an estate plan” from Bangor Daily News.

Death and dying are not easy to talk about, but these conversations are necessary, especially if the family wants to continue as a farming or ranching family. For aging farmers and their families, here are a few tips to demystify the planning process and help get things started.

What are your goals? Think of estate planning as succession planning. This is about making decisions about retirement and handing down a business to the next generation. If you had a regular job, you’d have far less to consider. However, succession planning for a family business owner involves more resources and more people. Having a clear set of goals, makes that transition easier. Add to that list: your fears. What don’t you want to happen? If your children don’t know how much you want them to keep the farm in the family, they may take other actions after you die. Share your goals, hopes and yes, worst case scenarios.

Build a team of professionals. The number of moving pieces in a family farm means you’re going to need a strong team. That includes an estate planning attorney who has worked with other farm families, an accountant, a financial advisor and an insurance professional. Depending on your family’s communication skills, you might even consider bringing a counselor on board.

List out your assets. Don’t assume that anyone in the family knows the value of your assets. That includes deeds to land, titles of ownership for vehicles, information about any property mortgages or loans or leases. If you are leasing land to others, you’ll need the lease agreements as well as property titles. If your lease agreements are based on a handshake, your attorney may request that you formalize them. A verbal agreement may be fine while you are living, but if you should pass and your heirs don’t have the same relationship with your tenant, there could be trouble ahead.

Consider who will be in charge when you are not there. Whether you are planning to work until you die or making a retirement plan, one of the hardest decisions will be to name a successor. Inter-generational politics can be tricky. You’ll need an unbiased evaluation of who the best candidate will be to take things on. However, going into this now is better than hoping for the best. That’s when things go south.

Talk to your estate planning attorney. Just as people should start planning for their retirement as soon as they start working, planning for the transition of the family farm is something that should start when it is years in the future, not when the transition is a few months away. It’s a process that takes a long time to do right.

Reference: Bangor Daily News (March 5, 2020) “How farmers can start an estate plan”

For more information on asset preservation and estate planning, please visit my estate planning website.

Long Term Care Varies, State by State / New York, NY & Greenwich, CT

“States can differ dramatically when it comes to long term care regarding availability, quality, government benefits, retirement communities and cost.”

What if your parents live in Oklahoma, you live in Nebraska and your brothers and sisters live in New York and California? Having the important conversation with your aging parents about what the future might hold if one of them should need long-term care is going to be a challenge, to say the least.

It’s not just about whether they want to leave their home, reports the article “What is the best state for long term care” from The Mercury. There are many more complications. Every state has different availability, levels of care and taxes. If the family is considering a continuing care retirement community, or if the parents already live in one, what are the terms of the contract?

The differences between states vary, and even within a state, there can be dramatic differences, depending upon whether the facility being considered is in a metropolitan, suburban or rural area. There’s also the question of whether the facility will accept Medicaid patients, if the parents have long-term care insurance or any other resources.

Here’s what often happens: you open up a glossy brochure of a senior community in a warm climate, like Florida or Arizona. There are golf courses, swimming pools and a great looking main house where clubs and other activities take place. However, what happens when the active phase of your life ends, slowly or suddenly? The questions to ask concern levels of care and quality of care. Where is the nearest hospital, and is it a good one? What kind of care can you receive in your own apartment? Are you locked into to your purchase, regardless of your wishes to sell and move to be closer to or live with your adult children?

And what happens if you or a “well” spouse runs out of money? That’s the question no one wants to think about, but it does have to be considered.

For people who move to Florida, which has a very generous homestead exemption for property taxes and no state tax, the incentives are strong. However, what if you become sick and need to return north?

For seniors who live in Pennsylvania and receive long-term care and other services, the well spouse’s retirement funds are exempt for Medicaid regardless of the amount. However, if you move over the state’s border to New Jersey, those accounts will need to be spent down to qualify for Medicaid. The difference to the well spouse could be life changing.

Delaware and New Jersey have Medicaid available for assisted living/personal care. Pennsylvania does not. The Keystone State has strict income limitations regarding “at home” services through Medicaid, whereas California is very open in how it interprets rules about Medicaid gifting.

The answer of where to live when long-term care is in play depends on many different factors. Your best bet is to meet with an established elder law attorney who understands the pros and cons of your state, your family’s  situation and what will work best for you and your spouse, or you as an individual.

Reference: The Mercury (March 4, 2020) “What is the best state for long term care”

For more information on elder law, retirement planning and estate planning, please visit my estate planning website.

Surprising Ways Beneficiary Designations Can Damage an Estate Plan / White Plains, NY & New York, NY

“During the estate planning process, these beneficiary designations are reviewed to ensure that the beneficiaries are correct, and that the distribution of these assets conforms with the client’s intended estate plan.”

Naming a beneficiary on a non-retirement account can result in an unintended consequence—it can even topple an entire estate plan—reports The National Law Review in the article “Overuse of Beneficiary Designations: How They Can Derail a Client’s Estate Plan.” How is that possible?

In most cases, retirement accounts and life insurance policies pass to beneficiaries as a result of the beneficiary designation form that is completed when someone opens a retirement account or purchases a life insurance plan. Most people don’t even think about those designations again, until they embark on the estate planning process, when they are reviewed.

The beneficiary designations are carefully tailored to allow the asset to pass through to the heir, often via trusts that have been created to achieve a variety of benefits. The use of beneficiary designations also allows the asset to remain outside of the estate, avoiding probate after death.

Apart from the beneficiary designations on retirement accounts and life insurance policies, beneficiary designations are also available through checking and savings accounts, CDs, U.S. Savings Bonds or investment accounts. The problem occurs when these assets are not considered during the estate planning process, potentially defeating the tax planning and distribution plans created.

The most common way this happens is when a well-meaning bank employee or financial advisor asks if the person would like to name a beneficiary and explains to the account holder how it will help their heirs avoid probate. However, if the estate planning lawyer, whose goal is to plan for the entire estate, is not informed of these beneficiary designations, there could be repercussions. Some of the unintended consequences include:

Loss of tax saving strategies. If the estate plan uses funding formulas to optimize tax savings by way of a credit shelter trust, marital trust or generation-skipping trust, the assets are not available to fund the trusts and the tax planning strategy may not work as intended.

Unintentional beneficiary exclusion. If all or a large portion of the assets pass directly to the beneficiaries, there may not be enough assets to satisfy bequests to other individuals or trust funds created by the estate plan.

Loss of creditor protection/asset management. Many estate plans are created with trusts intended to protect assets against creditor claims or to provide asset management for a beneficiary. If the assets pass directly to heirs, any protection created by the estate plan is lost.

Estate administration issues. If a large portion of the assets pass to beneficiaries directly, the administration of the estate—that means taxes, debts, and expenses—may be complicated by a lack of funds under the control of the executor and/or the fiduciary. If estate tax is due, the beneficiary of an account may be held liable for paying the proportionate share of any taxes.

Before adding a beneficiary designation to a non-retirement account, or changing a bank account to a POD (Payable on Death), speak with your estate planning attorney to ensure that the plan you put into place will work if you make these changes. When you review your estate plan, review beneficiary designations. The wrong step here could have a major impact for your heirs.

Reference: The National Law Review (Feb. 28, 2020) “Overuse of Beneficiary Designations: How They Can Derail a Client’s Estate Plan”

For more information on elder law, tax planning, retirement planning and estate planning, please visit my estate planning website.