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Updating Estate Plan Beneficiaries

As we have entered the fall season and get ready to set our clocks back in November, here are some insights to motivate you to finish the year strong by making sure your estate plan is secure.

The most important thing to consider when reviewing an estate plan is to make sure that your current intentions regarding the disposition of your assets is properly conveyed.  The most common mistake which our office encounters is the failure to review beneficiary designations on assets.  This failure can result in several unintended consequences.

First, make sure that you have living beneficiaries on assets such as life insurance or an IRA.  Placing a beneficiary on an asset avoids the need to open probate as to that asset. Often on older assets, the beneficiaries may be deceased or the designation will simply say “my estate.”  I recently assisted an older gentleman with planning.  As we were reviewing his assets, it was discovered that his life insurance policy was purchased over 50 years ago and still named his parents as beneficiaries of the policy, even though they had died many years ago.  If beneficiaries are deceased or are the owner’s estate, the strategy of avoiding probate will be lost.

It should be noted that beneficiaries can be placed on assets other than life insurance or an IRA.  For example, you may be able to place beneficiaries on your checking or savings account, depending upon the financial institution.  It doesn’t hurt to ask whether your financial institution allows such beneficiary designations.

Second, both inheritance and income taxes are impacted by beneficiary designations.  Pennsylvania is one of only a few states which impose inheritance taxes upon someone’s death.  The rate of tax depends upon the relationship between the deceased and the beneficiary.  Assets which name spouses and charities are not taxed.  If the asset names your descendants as beneficiary, a 4.5% inheritance tax rate is imposed.  The tax rate for siblings is 12%, and for all other beneficiaries, a 15% tax rate is imposed.  Thus, reviewing your beneficiaries will allow you an opportunity to strategize the impact inheritance taxes will have upon your death.

In addition to inheritance taxes imposed upon your death, there could be income taxes imposed when transferring assets such as an IRA or annuity. If you plan on making charitable contributions as part of your estate plan and you own an IRA or annuity, consider whether naming the charity as beneficiary of your IRA or annuity will reduce tax liability upon your death.  Nonprofit organizations governed by 26 U.S.C. § 501(c)(3) are not subject to this income tax, so naming a charity as a beneficiary of an asset such as an IRA or annuity and naming others as beneficiary of other types of assets may be a way to reduce the amount of income taxes imposed upon your passing.  To determine whether this is an appropriate strategy for your estate plan, contact an experienced elder law attorney.

Third, reviewing beneficiaries of your estate plan can help avoid costly mistakes in the event you need long term care and receive Medical Assistance benefits.  When an individual receives Medical Assistance benefits, the Department of Human Services Estate Recovery program can attempt to collect payment from an individual’s estate when they pass away.  Currently, the Estate Recovery Program is only able to recover repayment of Medical Assistance payments from probate assets.  Probate assets are those assets which are in an individual’s name alone and do not contain a beneficiary designation.  Thus, if your assets do not name a beneficiary or simply name your estate, the asset is likely subject to probate.  If the asset is subject to probate, it may also be subject to the Estate Recovery program.  Regularly reviewing and updating your beneficiary designations is a great way to plan ahead to avoid such costly mistakes.

A fourth benefit to a regular review of your beneficiary designations is to ensure consistency with the rest of your estate plan.  Many estate disputes arise over an inconsistent estate plan.  For example, an individual passes and they possess a Will leaving all probate assets to a child and stepchild. A life insurance policy, however, names only the child as a beneficiary. This plan could be ripe for dispute.  An individual can have an estate plan which names beneficiaries on non-probate assets which are different than the beneficiaries named in a Will, but it is important to note in your estate plan that you are aware of the inconsistencies and that your intent is to have different beneficiaries on various assets in your plan.  An experienced elder law attorney can make sure your estate plan reflects your testamentary intent.

Finally, if you do regularly review your estate plan and beneficiary designations, it is important to know when to make updates. In the absence of any other compelling reason, it is important to consider changes after the following life events:  1) a beneficiary’s passing; 2) a beneficiary’s medical diagnoses; 3) a beneficiary beginning to receive public benefits; 4) your divorce; and 5) the divorce of a beneficiary.  If you’re contemplating changing your beneficiary designations due to one of the above referenced life events, consider seeking the advice of an experienced elder law attorney.