A Common Estate Planning Mistake
A comprehensive estate plan is a financial planning necessity. If done correctly, it should provide you with a clear — and tax-efficient — plan for leaving a legacy to your loved ones and favorite charitable organizations.
Many people don’t realize, however, that any beneficiary designations they indicate on bank or brokerage account forms, for example, could contradict and supersede certain instructions outlined in their will.
Yes, that’s right—supersede. Over the years, I have seen some clients make this mistake and it can have unintended and unwanted effects. For example, you could disinherit a loved one or create a negative tax situation—precisely those consequences that you and your advisors took great pains to avoid in the drafting of your estate plan. Working closely with your financial advisor, care should be taken to ensure that your will and beneficiary forms are coordinated and reflect your true wishes.
Here’s what could go wrong. Adding a Transfer on Death (TOD) or Payable on Death (POD) beneficiary designation on your bank or brokerage accounts, for example, could result in the funds being passed outright to your beneficiaries, effectively cancelling any benefits that would have been realized had the assets passed through a trust (as outlined in your will). This, in turn, could result in your assets not being handed down exactly how you originally intended, e.g., your minor children receiving large amounts of money at a young age.
When you are faced with beneficiary forms outside of the will and trust documents that you and your advisor(s) have carefully crafted, contact your advisor(s) before making any beneficiary designation changes. He or she can counsel you accordingly. You don’t want to inadvertently nullify your original — and true — intentions for your wealth after you are gone.