Most people go about naming their beneficiaries without giving it much thought, naming their spouse or naming their spouse and then their children in their Wills and on the beneficiary designation pages of investment accounts and life insurance policies. Few people remember to check periodically.
But peoples’ situations change. We change jobs. We move an account from one bank to another or one broker to another. Names get dropped or are not added. Designations get changed or should be changed but are not. The problems this creates can be a real headache for heirs – and result in unanticipated and unwanted situations.
Watch this video for tips on naming your beneficiaries. Click here to watch on YouTube: Naming Your Beneficiaries.
Naming Your Spouse as Your Beneficiary
In Texas, your spouse cannot inherit from you after you divorce unless you make an affirmative statement that that is what you want.
But Texas law does not govern your 401(k), 403(b), 457 or other “qualified” (meaning tax deferred) funds. These are governed by federal law called ERISA and by the rules of the plan administrator. If your spouse does not sign and file a waiver before you get divorced, she remains your beneficiary afterwards.
Your spouse may still be your spouse when you die. But your spouse may remarry. Many of us hope that if we die first, our spouse will find a companion for the later years.
What happens then? If your spouse dies before her new companion, your money could pass to him and his children, not to yours. One way to prevent this is to create a pair of trusts, one going to your spouse regardless (the marital trust) and the other going to your children at her death (the “QTIP” trust, granting a qualified terminable interest in property). Another would be to create a trust which supports your spouse during her life but then goes to the children.
But, creating and administering trusts costs money.
A third approach is for your will and that of your spouse to include a statement that they are made by contract, promising not to change them in order to protect your children’s eventual inheritance.
You can’t prevent your spouse from marrying after you are gone (you may even think companionship is a good idea), but you can each agree that whatever you have inherited from one another and all your community property will pass to the children, not to the new spouse. Your spouse could leave his or her separate property to someone else, but the inherited property and the community property would pass to the children.
Many people’s principal investment is their home. To pass this to the children (or whomever you and your spouse choose), you and your spouse can sign and record a “Lady Bird” Deed (officially called a General Warranty Deed Reserving and Extended Life Estate) or, depending on the circumstances, a Transfer on Death Deed.
The deed could even be to a trust naming children and grandchildren but not that pesky son-in-law. These deeds are revocable. The surviving spouse could change his or her mind. One way around this is to create a qualified interest in real property trust.
Naming Your Children as Beneficiaries
There is more to consider than the possibility of a pesky son-in-law. Your children’s lives – and your grandchildren’s – will change. One child may become ill, unemployed, widowed or divorced. You may have a grandchild with special needs.
You may have children – or grandchildren – who could use a little motivation, whether to finish school or to stay clean or not to rely on the trust as their principal means of support.
Many of us have little to leave anyone after long years of retirement. We may need simply to check with the plan administrator of our 401(k) to see that what there is will go where we want. But if we have more than a remembrance, a trust can help account for changing circumstances. The trustee can make discretionary distributions based on the standards we establish.
Estate Planning attorney, Terry Garrett, is a member of the National Academy of Elder Law Attorneys and is active in the Texas and Austin Bar Associations. She graduated with honors from Cornell University. She was on the Dean’s List at Wharton Business School. She earned her J.D. at Columbia Law School, receiving the Parker Award and a Mellon Fellowship.
She assists families of people with special needs, people planning for the retirement years and people administering estates.