This is an additional part in a series of articles on updating your plan. The first article dealt with the importance of updating financial and medical powers of attorney. The second part of the series looked at the importance of updating a basic property planning document, such as a trust or will. Together, these documents are the cornerstone of even the simplest real estate plan and it is important to keep them up to date. However, it is also important to ensure that your recipient assignments are up to date.
The designation of the beneficiary instructs where the asset goes when you die. Some of the important assets transferred by beneficiary designation are IRAs, 401(k)s, and life insurance. These assets can be a large part of your overall assets, so it is important to ensure that these beneficiary assignments complement your comprehensive estate plan. These designations control the disposition of the original, despite the fact that your will or will has conditions that conflict with it. For example, let’s say your will or trust leaves everything to your child. However, you have an asset, such as an IRA, that identifies your mother as the beneficiary. The appointment may precede the birth of your children. In this scenario, your IRA will go to your mother, not your children. That’s why it’s important to verify beneficiary designations on the assets you own.
Many other assets, such as a bank account, brokerage account, or car, can have the designation “POD” (Payment Upon Death) or “TOD” (Transfer Upon Death). Like a beneficiary designation, a POD or TOD designation supersedes the instructions you put into the rest of your estate plan, such as a will or trust.
There is nothing inherently wrong with TOD, POD, or beneficiary assignments. When used correctly, they can be a simple and effective part of your overall plan. However, it is important to coordinate the entire property plan and consider the impact of each part on the other.
It’s easy for the plan to conflict with your wishes when using beneficiary assignments, TOD, or POD because assignments are fixed even as asset values change. For example, suppose Mary intends to equally leave her assets to her three children. Marie has a small brokerage account with POD for one of her children, Betty. Mary does not think of any of this, because there is language in her confidence that takes into account what Betty gets from the brokerage account. However, when the brokerage account rises to Betty in value, the Mary’s Trust can no longer make sufficient adjustments because it does not control enough assets to balance the brokerage account that goes directly to Betty.
Even though you choose to leave your assets, it is important to be mindful of changes in your desires, changes in asset values, etc. If you want to carry out your desires, it is important that you keep your entire plan up-to-date and think about how changes in assets may have a significant impact on your plan.
Stephen C. Hartnett, JD, LLM
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128