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Estate Planning: Beneficiary Designation in Financial Instruments

Estate Planning: Beneficiary Designation in Financial Instruments

Signing a DocumentIn many case, beneficiary designation is straight-forward. Most couples simply designated each other. However there are complications that should be understood and periodically reviewed.

Consider a case in which one spouse has limited capacity but is a beneficiary. A payer will likely ask a court for supervision, as they want to avoid liability created by paying to an incompetent person. While the final outcome will still be that the funds are released for the benefit of the beneficiary, a significant delay will likely result.

Additionally, the court will have the power to control the funds. In the best case, this will create an administrative hassle. In the worst case, it could thwart the intent of the of the deceased. Courts are notoriously conservative in asset allocation so a judge with limited financial sophisticated may actually introduce excessive risk by ordering an inappropriate asset allocation.

A similar situation can occur if minor children are designated as beneficiaries. Even if one parent or guardian is surviving, insurance companies routinely ask for court supervision. In the case of children, an excessively conservative asset allocation can be even more damaging.

Two steps can be taken to address this issue. The first is to periodically review beneficiary designation to note if life changes, such as decreased capacity, have taken place. The second is to consider the proactive designation of a trustee. This step can prevent or minimize court involvement.

Both of these steps should be part of an estate plan and should be periodically reviewed. If you would like assistance, please contact us.