Many & LoCoco Legal Blog

Saturday, March 16, 2013

Common Estate Planning Mistakes Regarding Life Insurance and IRA's

Common Estate Planning Mistakes Regarding Life Insurance and Individual Retirement Accounts (IRAs)

For many people, life insurance and/or retirement savings accounts are among the largest assets they have to bequeath to their children and grandchildren in their estate plans.  Sadly, without professional and personally tailored advice about how best to include life insurance and IRAs in one’s estate plan, there may be a failure to take advantage of techniques that will maximize the amount of assets that will be available for future generations. Here are some key considerations to reflect upon and make sure that they are implemented in your own estate plan.

Failure to Name and Update Beneficiaries

A death benefit of a life insurance policy and the assets in an IRA account usually transfer automatically to the named beneficiaries upon the death of the account holder, outside of the probate process. 

"Outside of the  probate process" are the key words. In other words, the funds pass directly to the named beneficiary, outside the parameters of the Will and succession of the decedent.  Normally, all the beneficiary has to do is fill out a claim form, and they get the funds in a matter of weeks. Usually  this is done without the attorney for the succession being involved, which means less legal fees owed by the Estate. But, this only happens with a named beneficiary. Thus, it is imperative to make sure that you have beneficiaries named for these accounts and to remember that situations do change.

If the account holder’s desired beneficiaries change, due to marriage, divorce, or other major life events, it is critically important to update the named beneficiaries as quickly as possible to prevent the asset from passing to an outdated beneficiary.  Or, in the case of death of the primary beneficiary, it is equally important to name contingent beneficiaries, who stand in the place of the primary beneficiary in case he/she predeceases the decedent.  The account holder should also be aware that circumstances change for the contingent beneficiaries as well.

Let me give an example to show you how important updating beneficiaries can be. I had this issue just  come into my office the other day, and had to inform the family of this horrible result.  


Sarah has an IRA in excess of $650,000. Sarah’s IRA documents name her husband, Harold, as the primary beneficiary of her IRA and Harold’s son, George, from Harold’s first marriage, as the contingent beneficiary.

Sarah and Harold divorce.

        After the divorce, Harold's son, George, hates Sarah for divorcing his father, and is very ugly towards her for a number of years, even refers to her publicly as the "devil".

       Harold dies.  

      Sarah, both after the divorce and after Harold's death, forgets to change the beneficiary and contingent beneficiary of her IRA account. She then dies. 

        Guess who gets her IRA. Yep, good old George, Harold's son, will receive the IRA.  

        Sarah, without question, would not have wanted this result. Had she just updated her beneficiary designation, this could have been avoided. But she did not, and this is the result. And no, George will not, out of the kindness of his heart, turn the $650,000.00 over to the family because he should do what Sarah would have wished.  It just does't happen that way.

       So that is how important naming and updating beneficiaries can be relative to your estate plan. 

Failure to Consider Naming a Trust as the Beneficiary When Dealing with Minor Children


When minor children are involved, most clients will create a Trust in their will so that the assets that pass down to their children will be controlled by the Trust. After all, if I have a large sum of cash, would I really want my child to control that money, or would it be better to be in aTrust, with a named Trustee who can handle the funds for my child.

The problem is, most people also have IRA's and Life Insurance Policies. And as we have seen above, these funds pass to the beneficiaries outside of their estate. Furthermore, these are usually accumulated and purchased by the client well before a client thinks of writing a Will. Thus, in the normal situation, the spouse is named as the primary beneficiary and the children are named as continent beneficiaries. 

Once the person drafts a Will and creates the Trust inside his Will, it is very important to change the contingent beneficiary of the Life Insurance Policy and IRA from the children and instead to name the Trust. That way, the funds from the Life Insurance Policy and IRA will be filtered to the Trust, again keeping it from going directly to the children. 

I have seen too many times where the deceased person's assets pass into a well created Trust in their will, to only have the children receive a vast amount of funds from a life insurance policy payable directly to them. Then, your estate is involved in Tutorship proceedings and the like to protect assets, all of which costs money, which can be avoided just by simply changing the beneficiary to the name of the Trust created in the Will.

All of the above is just a part of the intricacies of a well established estate plan. Call us today if you would like to review your estate plan with us.

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Many & LoCoco

Attorneys at Law

(504) 483-2332



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