Don’t Flunk Estate Planning 101

[The following is taken from The Washington Post’s article by Michelle Singletary, Sunday, May 26, 2002; Page H01 outlining advice given by Thomas D. Murphy Jr., a probate lawyer and senior partner at Murphy, McCoubrey & Auth in Massachusetts. It’s always good to stop and review these basic rules and their application to your situation.]

So much focus in estate planning is on avoiding taxes and probate court that many people overlook some simple steps that will make sure money from a life insurance policy or retirement plan ends up with their beneficiary of choice.
Insurance policies and retirement plans are specifically designed to allow an easy transfer of assets to dependents and survivors, yet simple mistakes often thwart the best of intentions. Many of those mistakes are made by people whose disbursement of assets should be relatively simple.
Assigning beneficiaries is something people often do their first day on the job when they are going over benefits with a new employer and they don't realize the importance of their choices.
Several common pitfalls in designating beneficiaries are:

• Naming your estate as the beneficiary. This can undo certain policy or retirement-plan advantages. For example, insurance benefits are generally not subject to claims from creditors, but an estate is. If your estate is the beneficiary, your insurance benefits may no longer be exempt. Also, naming an estate as beneficiary will result in the liquidation of an individual retirement account upon your death, with taxes becoming due immediately. This can deprive a surviving spouse of continued tax-free growth of that money. Check with a tax expert or lawyer before naming your estate as a beneficiary.

• Failure to name a secondary beneficiary. If your primary beneficiary dies before you, or at the same time, and you have not named a secondary beneficiary, your insurance policy or retirement plan will bounce back to your estate. In that event the money will be distributed according to your will or, if you have no will, according to your state's laws.

• Naming minor children as beneficiaries. Generally, insurance companies, pension plans and retirement accounts will not pay death benefits to minors. Benefits are held until a court-approved guardian or trustee is appointed. If you want to provide for minors, name a trustee or establish a trust. Failure to do so will mean the court will name one for you.

• Overlooking tax ramifications. Many people have misconceptions about what is and isn't taxed. Life insurance benefits are generally free from federal income tax. As for tax-deferred accounts, in general, spouses are the only party that can continue to defer taxes in tax-deferred accounts and this is usually done by rolling it into another tax-deferred account of similar type. Consult a tax professional to find out the tax ramifications when naming beneficiaries.

• Failing to update records. People often neglect to make changes to their insurance policies or retirement accounts when their family situation changes. Even in instances when a will indicates otherwise, designated beneficiaries in policies and insurance plans usually supersede any other indications. And generally, there is no satisfactory recourse. So make it a habit to review your insurance policies and retirement-plan records. A checklist of life events requiring a document update can be found at

• Failure to be specific. Ambiguities can complicate payment and leave a door open for dispute. For example, don't just write on the line for beneficiary "my wife" or "my child." That wording may not be sufficient, particularly in instances of multiple marriages. In naming beneficiaries, use full names.

• Assuming your will "has you covered." Generally, beneficiaries named in insurance policies and retirement plans trump any instructions you leave in your will. Make sure you have specified beneficiaries in your policies and plans. Many bank and investing accounts have mechanisms for naming beneficiaries so those assets can avoid probate. Check your bank and credit union accounts, CDs, equities and mutual funds to see if "payable on death" or "transferable on death" options are available.

• Not leaving instructions as to where your will, insurance papers and other important records are kept. All the financial and tax advice in the world is useless if people can't find your documents or don't know of their existence. Make sure your family is familiar with your most important records and where they are kept. Store important records in a secure file, vault or online file and inform your family of their location.

Do your loved ones a favor. Check your records so you can avoid these estate mistakes.