Design Professional's Practice Bulletin

Volume 4, Number 2 — October 2000

This Bulletin addresses recent developments affecting Design Professionals as well as business concerns as important as the specific professional and technical issues they face.

Editors: Neil P. Clain and Richard J. Davies

What to do Once the Will is Signed -- The Importance of Coordinating Life Insurance and Retirement Plan Beneficiary Designations with Your Will

By Michael Maransky, Esquire, CPA

One often overlooked aspect of the estate planning process is coordinating life insurance and retirement plan assets with your Will. Many people think that their estate plan is complete once their Wills are signed. Not only is this far from the truth, but in cases where life insurance and retirement benefits make up a significant part of a person's assets, failing to coordinate the beneficiary designations on insurance policies and retirement plans with the Will may lead to unintended, and in some cases disastrous, consequences.

Life insurance proceeds and retirement benefits require special attention because they are considered "non-probate" assets. This means that your Will does not control how these assets are distributed. Instead, insurance policies and retirement plans are contracts, the benefits of which are distributed according to their terms. Of course, as the owner of the insurance policy, or as a participant in the retirement plan, you have a say in how these assets are distributed by designating a beneficiary.

Problems with life insurance policies and retirement plans occur when people make beneficiary designations that are inconsistent with their Will provisions. For example, a common estate plan for a married person with minor children includes a Will that creates a trust upon the death of both parents. The purpose of the trust is to safeguard and provide effective management of family assets until the children are mature enough to handle money and manage assets on their own. If this same person also owns life insurance or participates in a retirement plan and has named her children as beneficiaries of the insurance policies or the retirement plan assets, these assets will be paid directly to the children. These assets will not pass through her Will and, as a result, will not become part of the trust created by the Will. The unfortunate result is that this mother intended for all of her assets to be held in trust for the benefit of her children, but because she failed to properly designate the trust created in her Will as the beneficiary of her life insurance policy and retirement plans, her children will receive these assets as soon as they run eighteen.

Another common misstep with insurance and retirement plans often occurs when there is a change in family circumstances, like divorce or remarriage. The mistake made is that the owner of the life insurance policy, or the participant in a retirement plan, fails to remove the former spouse as beneficiary and replace him/her with the new spouse. Although Pennsylvania law states that a former spouse is automatically deemed removed from a Will after a divorce, life insurance policies and retirement plans produce a different result. Again, these policies and plans are contracts and their terms must be observed so the designated beneficiary will be given the policies' proceeds of the plans' benefits. Consequently, if you do not change your designated beneficiary, your former spouse will receive a windfall.

Making sure your estate plan is properly coordinated to avoid these common pitfalls is easy. Simply request a copy of the beneficiary designation form that is on file with your life insurance company and retirement plan administrator and take it to your lawyer together with a copy of your current Will. A cursory review of the documents will tell him or her whether or not your life insurance, retirement plans and Will are properly coordinated. If they are not, completing the new beneficiary designation forms with the help of the lawyer will solve your problem. Taking a few minutes now to take care of these important details can preserve your family's financial well being in the future.

© 2000 Powell, Trachtman, Logan, Carrle & Lombardo, P.C.

This bulletin is intended for general information purposes only and does not constitute legal advice. The reader should consult with legal counsel to determine how laws, suggestions and illustrations apply to specific situations.