Estate Planning

Most clients are surprised to learn that they have done at least 75% of their estate planning before they even have a Will. How can that be?

Do you remember completing a beneficiary designation form when you bought life insurance? How about when you opened up your 401(k)? 

Bingo. That’s estate planning and you have already done it with some of your estate’s largest assets.

Did you know that these assets get distributed directly to your named beneficiaries, regardless of what your Will says?

If you don’t remember completing these forms, you should check your account and make sure you have, in fact, named your intended beneficiaries and done so properly.  

And by “properly,” I mean something a little different than what you might think if you have minor children. 

In Maine, children under the age of 18 cannot hold legal title to property. Consequently, they should not be listed directly as beneficiaries if they are underage. While minors, they need an adult to hold that property for their benefit and may have to go through a court process in order to get an adult appointed for that purpose.

There are a couple of options to do this correctly and avoid court.

One, you can name an adult to serve as custodian for your child’s property under Maine’s Uniform Transfers to Minors Act (UTMA). There is special language you need to use to accomplish this, and you should talk to an attorney about the pros and cons of such an arrangement. For example, under this law, an adult custodian can only hold this property until the child turns 21. This may not be ideal, given the amount at stake (hint: think about what your financial priorities might have been if you received a lump sum of cash at 21).

Two, you can set up a living trust or a trust under your Will to hold the property for the benefit of your children. A trust gives you more control over how and when that asset will be distributed than an UTMA account does, but it is more expensive and time-consuming to set up. There are also some special distribution rules and considerations that apply when a trust is named as a beneficiary of a retirement account. You should discuss that with your attorney as well.

If you do set up a trust to hold property for your children, you will need to name the trustee of that trust as the designated beneficiary. Your attorney should give you the proper language to use to name the trustee to make sure that is correct and unambiguous.

A word of caution! You can usually update your beneficiary designations online, using the account administrator’s online form. However, these forms may limit you to entering an individual’s name or limit the number of characters you can use. (I have encountered this personally.) You may not have sufficient space to appropriately name a trust – or you may not be able to name one at all. If that happens to you, do not be deterred! Also, do not get clever and try to abbreviate or just enter the name of the trustee without also identifying the trust. 

Pro Tip: Request or locate a hard-copy beneficiary designation form from your administrator, complete the name of the trust fully in the form, and submit it to the administrator the old-fashioned way. If the form itself is still limiting, you can reference and attach your own document with the full names to their form. It may take you a few extra steps, but it is worth it.

An ambiguous or improper designation may lead to litigation, a delay in the distribution of the funds, or worse, a distribution to an unintended beneficiary. 

Have you named your kids or grandchildren directly as beneficiaries? Let’s talk about what you can do to take care of the kiddos in the event they inherit from you while they are minors. Email or call today.