Who You Should Be Careful Naming as a Beneficiary (And Why)

One of the most important you’ll ever make in estate planning is who you choose to inherit your assets. These people called your beneficiaries are who will receive everything you own– like life insurance policies, retirement accounts, and certain types of bank accounts – after you pass away. So your choices carry a lot of weight.

That’s why it’s so important to carefully consider your choices and keep your beneficiary information up-to-date. At Vollrath Law, we’ve seen how failing to properly set up beneficiary designations can lead to unintended consequences and even legal battles between loved ones. By taking the time now to understand what’s at stake, you can ensure your assets go exactly where you want them to.

Naming Your Estate as the Beneficiary

One common mistake people make is naming their estate as the beneficiary on accounts like life insurance policies or retirement plans. While this may seem like an easy solution, it can create a number of problems down the road.

The biggest issue is that naming your estate forces those assets to go through probate – the legal process of proving your will and distributing your possessions. Probate is public, time-consuming, and expensive.

Alternatives to Naming Your Estate as Beneficiary

Instead of naming your estate, there are better ways to ensure your assets transfer directly to the people or organizations you want:

• Naming a revocable living trust – This allows you to control how your assets are managed and distributed while avoiding probate altogether.
• Naming specific individuals as beneficiaries – You can designate family members, friends, charities, or anyone else to receive funds directly.

In most cases, having your assets pass outside of probate by using beneficiary designations is the better approach. It’s more efficient, private, and ensures your wishes are carried out exactly as you intended.

Why You Shouldn’t Name Minor Children Directly

When our clients are naming beneficiaries, we caution against listing minor children directly to receive large inheritances outright.

There are a few key reasons for this:

1. Legal restrictions around minors inheriting significant assets. In Florida, children under 18 are not legally allowed to directly receive and control funds over a certain dollar amount.
2. Risk of court intervention and possible mismanagement. If minors are named directly, the courts will likely get involved by appointing a guardian to oversee the assets until the child becomes a legal adult. There is always the risk this court-appointed person may mismanage the money.
3. Loss of your control and guidelines. By naming minors outright, you lose the ability to set any rules or stipulations about how/when your children can access and use their inheritance.

To avoid these pitfalls, there are better options to consider when leaving money or assets to minors.

Creating a Trust for Minor Beneficiaries

Creating and funding a trust is often the ideal solution for leaving an inheritance to minor children. When you set up a trust, you can:

• Name a trustee of your choosing to manage the assets
• Specify exactly when and how the funds should be distributed (e.g., portions at certain ages, money for education, etc.)
• Include rules about how the money can and cannot be used
• Ensure proper management until your child is mature enough to handle the inheritance responsibly

Trusts provide much more control and flexibility compared to naming minors directly. They allow you to make provisions based on your family situation.

Using Custodial Accounts for Minor Beneficiaries

Another option that could work is naming a custodial account for the child, like a UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account.

These accounts allow you to name an adult custodian who will manage and invest the assets until the child reaches the age of majority. At that point, the money must be distributed outright to the child.

Custodial accounts are simpler to set up than trusts, but they do have some drawbacks:

• You cannot extend the age for distribution past 18/21
• The child gains complete control at 18/21, even if they are not financially mature
• There are fewer rules and guardrails around how the funds can be used

So, while custodial accounts work for leaving modest amounts of money, trusts tend to be the better choice for larger, more substantial inheritances you want properly protected.

Beneficiaries With Special Needs or Disabilities

When leaving an inheritance, you want to make sure you don’t accidentally disqualify a beneficiary from receiving important government benefits like Medicaid or Supplemental Security Income (SSI).

If you name someone with special needs directly as a beneficiary, the inheritance could be considered a countable asset that makes them ineligible for means-tested public assistance programs they rely on.

The solution here is to set up what’s called a special needs trust, sometimes referred to as a supplemental needs trust. This type of trust allows you to leave funds for your loved one, while still keeping them legally qualified for government benefits.

With a special needs trust:

• A trustee you name controls and manages the assets, not the beneficiary
• Funds can only be used for the beneficiary’s needs
• The trust’s assets are an exempt resource under program qualification rules

This way, the inheritance enhances your loved one’s quality of life without disrupting the government services they depend on for basic care. Drafting a special needs trust requires special language and expertise, so it’s wise to work with an attorney well-versed in special needs planning.

Other Risky Beneficiary Choices to Avoid

While minor children and those receiving government benefits are common concerns for clients, other types of beneficiaries should be considered as well:

• Estranged relatives or former spouses – Family relationships can be complicated, so think carefully if an estranged relative or ex-spouse really aligns with your wishes.
• Pets – Pets can’t legally own property, so naming them directly as beneficiaries is problematic. Consider a pet trust instead.

The bottom line is that you’ll want to weigh the personal dynamics and risks involved before naming certain beneficiaries who may be problematic or have conflicts of interest. At Vollrath Law, we’ve seen situations where inheritances have gone to unintended recipients due to poor beneficiary decisions.

Why Regularly Reviewing and Updating Beneficiaries is So Important

One final point we always emphasize to clients: It’s critical to review and update your beneficiary designations over time.

Life constantly evolves – you may get married, divorced, have children, experience deaths in the family, or see your relationships with people change in other ways. Any of these major life events should be a trigger to revisit who you have named as your beneficiaries.

We recommend a thorough review of all your beneficiaries at least once every few years. Aligning these designations with your current realities and wishes is one of the most important things you can do as part of your overall estate plan.

Don’t Make Beneficiary Decisions Alone – Let Our Estate Attorneys Guide You

As you can see, naming beneficiaries to receive your assets after you pass away involves numerous potential pitfalls. From trusts to special needs planning to avoiding unintended consequences, it’s not a decision to take lightly.

We understand this is a lot to think through on your own. Our estate planning attorneys at Vollrath Law would be happy to review your situation and guide you through setting up proper beneficiary designations. We can ensure your loved ones are provided for, your wishes are carried out as intended, and your assets are managed and distributed in a responsible manner for years to come.

If you’re ready to start your estate plan or have questions, we invite you to contact our office today to schedule a consultation.