In my practice, I rarely come across clients who do not know who they want to leave their assets to when they are no longer around. Barring family disputes, choosing beneficiaries is not a difficult issue for most people. What’s sometimes confusing for some people is how to ensure that inheritance takes place as they intend. The confusion clears up when they understand more about how beneficiaries can be provided for — clients can start to categorize who inherits what, and how.
NEW YORK LAW ON WHO INHERITS WHEN THERE IS NO WILL - THE GOOD & BAD
Beneficiaries can be chosen and named in wills, trusts and beneficiary “designations” as regards financial assets (e.g. life insurance, retirement accounts, bank accounts, investment accounts), and non-financial assets (e.g. art, jewelry). For married couples in common law states (such as New York), when a married person dies without a Will (intestate), the law operates to ensure that the surviving spouse receives at least 50% of the estate with the balance to be shared equally by their children. Some people view this as a natural safeguard for their loved ones as the law automatically makes the spouse and children beneficiaries.
It’s not unusual, however, for a person to prefer to leave some of even the bulk of his estate to, for example, a special needs or disabled sibling, knowing that his surviving spouse and children have been amply provided for in other ways through gifts of money and real estate that he made to them during his lifetime. But if this person passes on without a Will, his actual specific intentions may be thwarted by operation of law since his special needs sibling would not be included in the intestate distribution.
The point is this: having an estate plan document such as a Will leaves absolute control with you as regards inheritance of your estate; the law does not get to overrule your wishes if you’ve made them clear in a legally binding document. You may decide that your immediate family has sufficient assets (e.g. your children are now adults and your spouse is financially independent), and prefer that the bulk of your estate goes to a charity you love and wish to support or friends and other relatives. If you die without a will, that charity, and your friends and other relatives will not receive any part of your estate as New York intestate law extends only to familial beneficiaries.
WHY BENEFICIARY NOMINATIONS IN KEY FINANCIAL ASSETS ARE SO USEFUL
A key challenge in an intestate situation is to get the estate sorted out in probate, which naturally takes longer because the probate court has to (1) determine the specific details of the estate and (2) apply the formal rules of inheritance distribution on who inherits what and how much. If there is a Will, the estate is distributed according to the decedent’s instructions, but still requires the court’s approval (i.e. the Will has to be probated). If there is a Living Trust instead of a will, then the entire probate process is avoided, and distribution of assets can take place without the involvement of the courts, and according to the terms of the trust. A Living Trust can set out your wishes just like a Will but does not need to be sanctioned by the courts through probate. Given the probated wills are public records, there is a layer of privacy and confidentiality afforded by having a Living Trust.
Beneficiary Nominations, in contrast, operate entirely outside probate law — assets such as life insurance and retirement and bank accounts do not have to pass through probate to be distributed. Beneficiaries receive the proceeds of that part of the estate directly from the respective financial institutions. For example, if you’ve nominated your spouse as sole beneficiary to inherit 100% of your life insurance (death benefit), s/he will receive a check directly from the underwriting insurance company. There is no need to obtain court approval for the distribution.
Beneficiary designations override estate planning vehicles such as Wills and Trusts.
For unmarried couples whose bulk of assets comprise financial assets, completing your respective nomination forms is a quick and easy way to ensure that even without the protection of New York law (as explained above), your significant other and your children with that person are clear beneficiaries of these assets. Note: you’ll still need to set up Guardianship clauses in a Will for the protection of your children.
SITUATIONS THAT REQUIRE CLOSER ATTENTION
Spouses of Second Marriages. The one definite thing about second marriages is that there was a first marriage. If you or your spouse is remarried, then you’ve got to ensure that your beneficiary designations have been updated to include him/her. If, however, the asset that you’re looking to update is one that is subject to your divorce settlement, then the terms of that settlement override your current wish to include your new spouse as joint beneficiary. You’re pretty much “locked in” to whatever your agreed to in your divorce settlement - e.g. if your former spouse is to be the sole beneficiary of your 401k account, then you can’t change the beneficiary nominations to include your current spouse. Can your former spouse waive your legal obligation? Yes and if so, make sure you get an attorney to secure a proper legal waiver. Note also that the opposite is also true — if your former spouse was named a beneficiary when you were married, and remains one not by the terms of the divorce settlement but simply because you forgot this over time, then you’ll have to update the nomination if you want your current/new spouse to become the new beneficiary.
Minor Children as Beneficiaries of Life insurance. The law does not permit minor children to receive life insurance proceeds directly. An adult has to manage these benefits and the most common solution is to name your children beneficiaries and name a custodian for the proceeds under the UMTA (Uniform Transfers to Minors Act). In New York, the UTMA custodian’s management of the money ends when the child or children reach 21 years old. No court supervision or sanction is required for the UTMA custodian to manage these funds. Most life insurance policies provide for UTMA custodianship and have the insurance company has proper forms for it. Make sure your life insurance adviser has obtained your signature for these forms where minor children are beneficiaries under your life policy. The custodian can be their other parent or any adult you trust to manage the insurance benefits. But note — if you set up a Living Trust for holding such assets for your children, you need to inform your financial advisers to ensure alignment with your UTMA selections.
Beneficiaries with Special Needs. Adult children with special needs may not be able to properly manage their inheritance.A Special Needs Trust is a highly effective solution. But it’s also a highly specialized area of law - this is not a legal vehicle you want to draw up on your own, because you could inadvertently deprive your special needs child of government benefits if you construct the trust incorrectly. You want to give your child as much quality of life and independence as you can when you’re no longer around, but you may also want to ensure that your other children (if you have any) or another relative is not burdened with that child’s care in adulthood. For obvious reasons, choosing the right Trustees too is a major consideration when setting up a Special Needs Trust.
Beneficiaries Who Aren’t Responsible Adults. It’s not unusual for some people to believe that if they left their estate to an adult they love, that person would squander their inheritance. The sad truth is that some people have adult children who have challenging issues as regards money. The solution would be to leave the property to a trust where these children are made beneficiaries under the trust. Again, Trustees should have some degree of financial acumen and access to estate planning attorneys for guidance.
Pets as Beneficiaries. I’ve got clients who adore their pets, and consider them as family, so setting up a pet trust is not as odd as it may sound. With a pet trust, you can designate the person who will become your pet’s new owner, with specific requirements, and you can also fund the trust to ensure that your pet’s new family is able to provide for it as per your specifications. Pets can also be “willed” to another person but without conditions attached.
There is much, much more to the overall topic of beneficiaries in estate planning as they pertain to wills, trusts and nominations. The point to note here is that the law does not have a one-size-fits-all solution. Which means it’s dangerous to assume that your estate will be inherited by those you intend. It’s entirely within your control to secure inheritance the way you want it, — start by thinking and outlining how and who should inherit and how you can ensure that they do — by using the guidance set out above.