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When you purchase a life insurance policy or open a retirement account, there are always pesky beneficiary designation forms which must be completed.  For estate planning purposes those forms and designations are crucial.  A beneficiary designation lets the administrator or financial institution know who should be the recipient of the funds or other benefits of the account should the owner of the account pass away.  Generally there is a primary beneficiary, meaning the individual/individuals or entity which will be first in line to receive the funds.  A contingent beneficiary is an individual/individuals or entity which is entitled to receive the funds should the primary beneficiary be unable to receive the funds (because of their death or other circumstance).   These designations are so important for estate planning purposes because they constitute binding contracts and dictate where and how these assets are transferred when a death occurs.  If the beneficiary designations are not filled our properly, it can cause many problems for the beneficiary or the assets may go to someone the owner had not intended.

Example 1:  Husband fills out the primary beneficiary designation on his group life insurance policy as follows:  100% to Wife, 100% to Minor Child 1, 100% to Minor Child 2.  Unfortunately, because the designation was done incorrectly, when husband passed away the insurance company could not interpret his intent and required wife to seek a court order to determine who should receive the funds.  Also, minor children are not able to receive funds.  The court process took about 6 months and cost thousands of dollars in attorneys’ and related fees.  Husband had been the sole wage earner for the family and the delay caused severe financial hardship.  Unfortunately, this is a true story and could have easily been avoided had the beneficiary designation been filled out correctly.

Example 2:  Father neglects to fill out the beneficiary designation on his retirement plan.  Father dies.  He is not married at the time but has two adult sons.  Because there was no beneficiary designated, Father’s estate is deemed to be the beneficiary of the account.  Because the account was valued at over $100,000, probate court action was required to transfer the funds to the sons.  This process took 6 months and cost thousands of dollars in attorneys’ and related fees.  Unfortunately, this is another true story and also could have been easily avoided. 

The moral of the story is that beneficiary designations are a crucial part of estate planning.  In fact, how to designate these beneficiaries can have serious income tax consequences as well.  Always seek the advice of an experienced estate planning attorney in making these decisions.

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