Estate planning requires careful thought to ensure your assets are distributed as intended. However, it's equally important to consider who should not be named as a beneficiary. Selecting the wrong individual or entity can result in disputes, delays, or financial challenges for your loved ones.
At Peach State Wills & Trusts, we have been guiding Georgia families in making sound estate planning decisions since 2007. With extensive experience, our team is dedicated to helping you avoid common beneficiary-related issues and protect your legacy.
Minors: Not Quite Ready for Responsibility
It might seem natural to leave assets to your children or grandchildren, but minors can't legally inherit property outright. If a minor is named as a beneficiary, the court will often appoint a conservator to manage the inheritance on their behalf. Unfortunately, this process may not align with your wishes. And, it also generally makes those assets unavailable to the minor in the event of a need.
Georgia's UTMA as a Potential Solution
The Georgia Uniform Transfers to Minors Act (UTMA) allows you to transfer assets to a minor, with the understanding that a designated custodian will manage them until the child reaches a certain age (usually 21). While this can work, the funds are automatically handed over once the child reaches that age—regardless of their readiness to handle a significant inheritance.
A Better Option: Trusts
If you want more control, consider creating a trust for the benefit of the minor. With a trust, you can set specific terms, like releasing funds for education or milestones (e.g., buying a home). This approach offers flexibility and peace of mind. And, as an additional benefit, it may also provide creditor protection for your beneficiary for such time as the assets remain in trust.
Individuals With Disabilities: Protecting Benefits
Leaving an inheritance to someone with disabilities might unintentionally disqualify them from crucial government programs like Medicaid or Supplemental Security Income (SSI). These programs have strict income and asset limits.
The Role of a Special Needs Trust
A Special Needs Trust (SNT), also called a Supplemental Needs Trust, is a powerful tool that allows you to provide for a loved one without jeopardizing their benefits. Funds in an SNT can be used for expenses like medical care, housing, and recreation while preserving eligibility for public assistance. Setting up an SNT requires careful planning, but it's one of the most thoughtful ways to safeguard their future.
Spendthrifts or Individuals Struggling With Addiction
Inheriting a large sum of money can sometimes do more harm than good, especially for someone who struggles with managing their finances or has a history of substance abuse. Without safeguards, the money could be squandered quickly, leaving them in a worse position than before.
Protective Trust Options
A Spendthrift Trust can shield the inheritance from being wasted. Here are two common ways to structure distributions:
● Staggered Payments: Release funds in increments (e.g., every five years or some other interval) instead of a lump sum.
● Trustee Control: Assign a trustee to manage the funds and ensure they're used appropriately. This could be a trusted family member or a professional fiduciary. And, they have discretion over how and when the funds are distributed. You can even include provisions requiring that the beneficiary comply with certain requirements in order to receive distributions.
Your Estate as the Beneficiary of a Life Insurance Policy
Naming your estate as the beneficiary of a life insurance policy might seem convenient, but it often is problematic. Doing so drags the policy proceeds into probate—a time-consuming and costly process. And, the insurance proceeds might then also have to be used to satisfy creditor claims, as opposed to being utilized for other purposes.
Name Individuals or a Trust Instead
To avoid these pitfalls, it's better to name specific individuals you wish to receive the proceeds outright, or to name a trust as beneficiary of your life insurance policy. This ensures the funds bypass probate and go directly to your intended recipient to be used as set forth in your estate plan.
A word of caution: Never leave your life insurance to another family member or friend with the wish that such person will use the money to care for your children or other relatives. Those funds become the property of the recipient beneficiary who can use, or not use, the money as they see fit. And, those funds are at risk of loss to that person's creditors and judgment holders. If you want the insurance money to care for your children, set up a trust (either a revocable living trust or a testamentary trust (created by your Will) to receive the money and lock it in for your specific purposes.
Ex-Spouses or Estranged Relatives
It's surprisingly common for people to forget to update their beneficiary designations after major life events like divorce. Remember, beneficiary designations on accounts like life insurance and retirement plans take precedence over your will. That means an ex-spouse could inherit simply because you didn't make the necessary updates.
Always Review After Major Life Changes
Keep your designations current. After a divorce, marriage, or any significant family change, review all your accounts to make sure the right people are listed. This oversight is a common issue, especially after divorces.
All beneficiary designations should be reviewed on a regular basis, regardless of major life changes. This process guarantees that your assets will be allocated in accordance with your present desires.
Keep Your Assets Out of Reach From Creditors
If you name someone who is facing financial troubles as your beneficiary, their inheritance might be seized by creditors. Even worse, it could become entangled in lawsuits or bankruptcy proceedings.
Don't Forget Contingent Beneficiaries
Life is unpredictable, and your primary beneficiary may pass away before you. That's why it's crucial to name contingent, or secondary, beneficiaries. This step ensures that your assets don't revert to your estate and end up in probate.
Let Us Help You Get It Right
Choosing the wrong beneficiary can lead to unnecessary stress, legal battles, or financial harm. But with the right planning, you can avoid these risks and ensure your assets are distributed exactly how you intend, and make sure that your beneficiary designations are coordinated with your estate plan. At Peach State Wills & Trusts, we're here to help Georgia families create comprehensive estate plans that stand the test of time.
Contact us today at 678-344-5342 to schedule a consultation and secure your peace of mind. Plus, if you have any questions about estate planning in Georgia, you can download our free guide: “Top 10 Mistakes to Avoid in Your Estate Plan.”
Your legacy is too important to leave to chance—let's work together to protect it.
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