Your estate plan in California can include several documents, many of which may require beneficiaries, like any trusts you may have set up and non-probate assets like 401(k), IRA accounts, life insurance policies, and pensions. Assets from these accounts will go to the beneficiaries upon your death. It is important, therefore, to make sure you choose your beneficiaries carefully.
There are many different factors to consider and different types of beneficiaries to identify. At Law Offices of Maria N. Jonsson, PC, our estate planning attorney based in Los Angeles handles all types of estate plans and can explain the importance of beneficiary designations so that you are confident in your choices. Contact us today at (424) 383-8445 to schedule a consultation and to make sure your estate plan includes the beneficiaries you want to protect if anything should happen to you.
A beneficiary designation involves naming the person who will directly receive an asset in the event of the asset owner's death. Assets that allow for beneficiary designations include insurance policies, retirement accounts such as 401(k) plans, IRAs, annuities, and other bank accounts.
The term Beneficiary is slightly different from the term Heir. Beneficiaries are chosen by the account owner during his/her life to inherit the property upon his/her death; while heirs are those who inherit the property of a person who dies without a will. Heirship is designated in the Probate Code of California.
Designating a beneficiary ensures that the named person (i.e., the beneficiary) will receive the asset directly upon your death – of course, if they survive you. A beneficiary designation overrides any provisions in a Trust or a Will.
Common Types of Beneficiaries in California
Common categories of beneficiaries include designated beneficiaries and contingent beneficiaries. Different eligibility rules may apply to different types of beneficiaries.
A designated beneficiary may include a family member, a friend, a charity, a trust, etc. Designated beneficiaries can be primary or contingent beneficiaries. A contingent beneficiary is a “backup” beneficiary who receives the asset in the event the primary beneficiary is also deceased.
Factors to Consider When Choosing a Beneficiary in California
When choosing a beneficiary, here are some points to keep in mind.
A beneficiary typically must be over 18 years of age. If you want to gift an asset to a minor upon your death, you may need to set up a trust for the benefit of a minor beneficiary and set forth the age of outright to such beneficiary. You may also set up a Custodial Account for the benefit of a minor. Custodial accounts are generally set up to distribute when the minor reaches age 22 or 25. In a living trust, you may set up distributions in stages upon a beneficiary's attaining certain ages, such as, at 21, at 25 and at 30, and you can spell out specific rules and guidance to the Trustee on how to and how much to distribute at each such age/stage.
Policy Specific Rules
Some life insurance policies or pension funds – including as Federal Employee benefits - set specific rules for designating a beneficiary. Make sure you are aware of these before making your decision and seek legal and financial advice about your options.
Challenges that can Arise in California with Beneficiary Designations
The best way to avoid most potential issues when it comes to beneficiary designation is to speak with a lawyer to ensure your designation is valid.
Here are some common challenges that may arise when designating a beneficiary.
Fixed Dollar Amounts
When designating a beneficiary, it is possible to set either a fixed dollar amount or percentage they will receive. However, a fixed dollar amount can cause issues if the value of the asset is insufficient (or if it increases in value, leaving a portion of the asset to probate). To avoid this, assign a percentage value instead.
No Contingent Beneficiary
Failing to name a contingent beneficiary may result in your asset going through probate. To avoid this, identify a contingent beneficiary who will receive the asset in the event the primary beneficiary cannot accept it––for example, where they have passed away.
Naming the Wrong Beneficiary
The identity of a named beneficiary may not be clear––for example, if several people in the family share the same or similar name. Names may also change as a result of marriage or divorce. Always confirm the correct legal name of your intended designated beneficiary and ensure you update the document to reflect any name changes.
“All My Children”
Designating “all my children” can create challenges. For example, if a child beneficiary dies before their parent, it may be unclear as to how their portion should be distributed. It may be divided between the surviving children, or instead, pass to their offspring. To avoid this issue, be specific when naming a beneficiary.
Failing to Update Beneficiary Designations
After a divorce, or if a named beneficiary has died, it is imperative to update prior beneficiary designations naming the (now ex) spouse, or naming a (now deceased) beneficiary. A former spouse named as beneficiary will receive the asset irrespective of the divorce. A named beneficiary who died will cause the asset to go into Probate.
Protecting Beneficiaries from their Creditors
Naming an individual beneficiary on an account or life insurance policy gives them a vested interest in that asset the moment you die, and makes such asset accessible to collection by the individual beneficiary's creditors. By contrast, if the same asset is owned in trust (such as a bank account), or if the trust is named as the beneficiary of the asset (such as a life insurance policy), then the asset-protection and spendthrift provisions of the trust can shelter to some extent the same individual beneficiary's interest in the asset from his/her creditors – when such individual is named as the beneficiary of the trust. As such, naming beneficiaries of a trust, and naming the trust as beneficiary to an asset can provide some asset protection compared to naming an individual as the direct beneficiary of the same asset.
Contact an Estate Planning Lawyer in Los Angeles Today
You have worked hard and have planned well and want to make sure your loved ones are secure in the event something happens to you. At Law Offices of Maria N. Jonsson, PC, our estate planning attorney in California helps families create comprehensive, inclusive estate plans that address all possible situations and challenges. We will make every effort to help you and your beneficiaries get what you intend to achieve through your estate planning. Contact us either by filling out the online Contact form or calling us at (424) 383-8445 to schedule a consultation.