Designated Beneficiaries and Estate Planning: Weakness in Designated Beneficiaries

 Posted on February 27, 2023 in Estate Planning

Yorkville Estate Planning Lawyer: Providing Effective Estate Planning Management Tools

This article will discuss designated beneficiary designations and estate planning. A designated beneficiary is a person or entity named in financial accounts or legal documents to inherit specific assets. Generally, designated beneficiaries are expected for financial accounts such as life insurance policies, retirement accounts, bank accounts, and annuities.

An individual name a designated beneficiary, such as a person or entity, to receive assets or property upon death. A significant benefit of designated beneficiaries is they avoid the probate process and create a smooth transition upon death. The transition period minimizes the costs and provides a smooth administration process to transfer assets from one person or entity to another. 

Weaknesses of Designated Beneficiary Status

Designated beneficiaries can be part of an effective estate plan, but they do have considerable weaknesses that must be considered. The common weaknesses of designated beneficiary designations are the following:

1. Failure to Update Beneficiary Designations. People are expected to fail to update designated beneficiary designations after major life events such as a divorce, birth, adoption of a child, or marriage.

2. Rigid Structure. Designated beneficiaries have a rigid structure because a company's form may limit the options for inheritance or force a person into accepting a designated beneficiary that could be better for their situation.

3. No Contingency Beneficiaries. A primary beneficiary may predecease the individual account holder, and there may be no contingent beneficiary or beneficiaries to pass the individual's estate to another person or entity.

4. Limited Control. The account holder or legal owner of the property lacks control and the ability to restrict one’s inheritance to protect their beneficiaries from immaturity, divorce, or creditor concerns.

5. Potential for Disputes Increase. Disputes may arise over the rightful owner of an asset or account to determine the rightful owner of an investment.

Estate Planning Strategies to Mitigate Designated Beneficiary Designation Weaknesses

Combining designated beneficiary designations with common estate planning strategies such as drafting pour-over wills, living trusts, or powers of attorney are excellent strategies to minimize costs and avoid probate issues. A Living Trust is a powerful estate planning tool to transfer ownership of assets into a trust during their lifetime. The "grantor" or "trustor" is the person or entity that created a trust during one's lifetime. A living trust is "revocable" because the grantor or trust may change their mind and amend the trust agreement during their lifetime. 

Unlike beneficiary designations, the Living trust provides flexibility to the grantor to adjust their estate plan automatically in case of a divorce, additional children or grandchildren, and/or incapacity or nursing home issues. Essentially, a person or couple creates a trust agreement similar to a will, which distributes their property upon their death. Unlike a last will, a living trust immediately takes effect and plans against incapacity. Moreover, a living trust avoids probate court, unlike a will. Therefore, a living trust is a powerful and flexible estate planning tool to minimize estate costs and avoid probate court. A Living trust also provides effective estate administration because a strategy is in place in case of a person's mental incapacity. A Living trust will also protect one's inheritance from creditor concerns of their beneficiaries, such as a divorcing spouse or a creditor.

Yorkville Living Trust Lawyer: Providing Smooth Transition Upon Death

Peace of Mind Asset Protection, LLC, owned by Gateville Law Firm, specializes in estate planning and trust administration for Kendall County residents in the nearby areas of Yorkville, Plano, Oswego, Bristol, Newark, Leland, Sandwich, and Somonauk. In summary, a living trust is a powerful estate planning tool that enables individuals greater control in distributing their estate plan and protecting their loved one's from the immaturity of age, divorce, and creditor concerns. The Living trust provides effective estate management because a smooth transition plan is in place in case of nursing home care or mental incapacity. Setting up a living trust requires the assistance of an experienced estate planning attorney. To set up an initial consultation, please consult your Yorkville Estate Planning Trust Lawyer at 630-882-2467 or via the online contact form.