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Episode 33: Who Gets What: The Ins and Outs of Beneficiary Designations
12 Plays1 month ago
Tune into this week’s episode where we’re cracking the code on beneficiary designations. Who really gets your retirement funds or life insurance? It’s all in the names you choose, and yes, these can override your will! We'll tackle common mistakes, like the pitfalls of naming minors directly and the risks of DIY legal kits. Learn smart strategies to avoid surprises and ensure your assets go exactly where you intend.
+ Stick around for Sam and Sara's list of people you shouldn't name as beneficiaries.
Join us every Wednesday for new episodes!
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Transcript
Introduction to Estate Planning Podcast
00:00:03
Speaker
Welcome to another episode of One of Us Knows What They're Talking About. And the other one is you. I'm Lori Burch, your host. Join us as we discuss and unpack wills, trust, estate planning, and probate law in a way that's actually informative, interesting, and well, hopefully entertaining. Because if you don't have a will, the state of Texas has one for you. Let's dive in.
Why Do Beneficiary Designations Matter?
00:00:40
Speaker
Okay, gang, so today we're gonna talk about beneficiary designations. o woo Sarah, what are beneficiary designations? Starting off strong. Wow. um I'm gonna take a guess that it's where you designate your beneficiaries and your documents. Okay, that works. Yeah. yeah. So um one thing that we have encountered over our many years when it comes to wills, trusts, estate planning and the like is that um a lot of your assets, your money and whatnot are actually not controlled. Listen up everybody, not controlled by whatever your will or trust says. Just imagine yourself walking into your HR department if you should have one at your place of work.
00:01:37
Speaker
And they offer you life insurance, retirement, and unlike the employees of Birch Law, you actually want to take advantage of the amazing retirement plan that's offered to you. And then you are provided with a form that says, if you kick the bucket, who do you want to get this? I.E. a beneficiary designation.
00:02:04
Speaker
And when you do things like that on life insurance, retirement, beneficiaries, even some bank accounts, that preempts or overrides anything a will or trust says.
Pitfalls of DIY Legal Forms
00:02:21
Speaker
And this actually, I mean, I know we, we never ever talk about the downsides of DIY informs and reduce legal services. We never talk about it. Sarah has no feelings about how bad it is, but I'm going to bring it up. I'm going to bring it up this time. It is one of the biggest downsides to fly by night law firms. That's a new expression. I want us to start using Sarah write that down. whyby night long I also kind of like cut rate law firms like the Allstate commercial is not a sponsor. Right? Is it because that ah mayhem is one of my favorite commercial characters of all time to avoid mayhem like me, which actually if we had thought about this before would have been a really great advertising campaign for birch law.
00:03:22
Speaker
But it's okay, we've come up with other things. We are we are an award-winning marketing firm with our our our ads. So it's okay. We will give Allstate the mayhem, but cut rate. So cut rate, fly by night law firms, but certainly online forms, will kits, all of that. Nobody is talking you through
00:03:50
Speaker
How are your life insurance beneficiaries set up? How are your retirement accounts set up? How are your investment accounts set up? And so if you have a life insurance policy that says everything to A, and then you have a will that says everything to B, if you pass away, A is going to get that life insurance policy, and B is going to get what's left, which for a lot of you is not very much, except maybe a house that has almost no equity in it.
00:04:19
Speaker
and a bank account that has $2. oh no right So ah very important that beneficiaries are coordinated the right way when it comes to these type of assets, even health savings accounts.
00:04:37
Speaker
have the ability to put beneficiary designations. Also, beneficiary designations is an umbrella term. If you see anything that has a TOD, transfer on death, POD, pay on death, that's all a type of beneficiary designation because it's saying if I die, this is the person who gets it. Hence, a beneficiary.
00:05:00
Speaker
right and What is fascinating to me not is how some financial institutions are completely baffled by the most common things. And we've had instances where we've told clients, Oh, you know, you've got your checking a account on at XYZ blank bank, not a sponsor. And you tell them, tell them that you want to put a beneficiary on your bank account. And they're like, well, we don't do beneficiary designations. We just do PODs. And I'm telling you people, I don't,
00:05:32
Speaker
I don't know how to handle this sometimes. I don't. But anyway, all it is, is a type of beneficiary designation. All of those things are. And there's very good uses of them, but you want to be very careful with how that's done. And probably the biggest, most common mistake that we see, and in partly because our law firm is focused a lot on families with young children. And so when you have a minor child,
00:06:03
Speaker
then in your estate plan, your will or trust, and you want them to receive anything, you have to have some sort of mechanism that if they're underage, that there is something that can be set up or someone else oversees this for them, also called a trust. And then there has to be a trustee and all of that. And then you pick the age or ages at which you think that they are hopefully crossing fingers, old enough or responsible enough to handle that money.
Issues with Minors as Beneficiaries
00:06:29
Speaker
And the biggest mistake, one of the biggest mistakes you can make is then going into your HR department, going to your insurance agent, going to your financial planner and slapping a minor child's name on a beneficiary designation. In fact, um my hope would be that there's not a single financial planner or insurance agent or HR person that would allow you to do that. But sometimes you're able to go online and fill these things out and there's nobody to tell you how completely horrible that is.
00:06:57
Speaker
Because let's say you have a will that says, here's my six year old. If they're under 25 and I pass away, I want everything to go to them. But I'm going to, my sister be the trustee and she can use this for their education and their needs. But when the six year old reaches 25, then the trust is going to end and it's going to go to them. And then you waltz over and you got your life insurance beneficiary and you just put the six year old's name.
00:07:21
Speaker
Well, a minor child cannot inherit money or assets directly. So the insurance company is going to give you a couple options. They're going to say, hey, we'll just hang on to it until they're 18. What do you think of that? And they will. If you don't like that idea, then they're not going to care that there's a will, a trust, a trustee. They're not going to care about that at all because you named a direct beneficiary. Remember that overrides any sort of estate plan you have. So that's irrelevant.
00:07:50
Speaker
So then what do you have to do? Well, then you have to go to the court, get the court to a point who will oversee it, which may or may not be the person that you wanted. In my example, your sister. And then the money is going to go into the court registry. Great return on investment there.
00:08:06
Speaker
And then at age 18, that money is just released to them. So it doesn't matter that this will with a trust is age 25. So like this money, which by the way, life insurance in this example is just cash. If you've got a hundred thousand dollar life insurance, that's just a hundred thousand dollars. That's just handed on over.
Advantages of Professional Legal Guidance
00:08:26
Speaker
So one of the most important things is making sure that when you're doing this, that you're doing this with a qualified law firm that is going to actually work with you and make sure that they're going to help you at least guide you, if not help you fill out forms, which virtual law does all of the the above in filling out these forms and getting those connected.
00:08:52
Speaker
Now that's not a one size fits all. There are many reasons why you might name different beneficiaries than you would name in your trust. Sometimes that is actually a planning strategy. If your parents gave you money as a down payment for your first home, and if they outlive you, you would like a portion of that to go back to them. Well, one really great way to do that is maybe make them a beneficiary on life insurance, or maybe it's a 50% beneficiary on life insurance or an investment or something.
00:09:18
Speaker
but then your will will be more streamlined to capture everything else where you have everything going to your spouse or to your children. So all of this is to say that the way that all these things are set up, investment accounts, retirement accounts, all of that is very, very important and you need to make sure that you've got careful advice. If it's a will that has a trust for kids, sometimes it's setting up a testamentary trust.
00:09:44
Speaker
as a beneficiary. Or if you have a living trust, sometimes it's setting up a living trust. If you're married though, sometimes you want the spouse to be named primary and then the trust to be named secondary. But these are all things, again, that you need to be working with a qualified law firm to really guide you on that. Sarah, Sam, and Cynthia, which is not the same letter, but very illiterate, alliteration, I don't know.
00:10:11
Speaker
Yeah, we're all iterating questions so far. What are what are our thoughts on this? What if I really, really, really trust my 20 year old? um He's like a brother to me. He's not my brother. But I really trust him. He makes really great decisions. And I just want him to have everything at once. Like, is that a good idea? He makes fantastic life decisions.
00:10:42
Speaker
at 20 years old? Uh-huh. I mean, look, I don't know, I don't know where you're trying to lead me here. but way know giant That's not smart. If you, I mean, if you think you're a 20 year old that, you know, when your life is able to handle this and that's who you want to name, you legally are able to name him. I love him, but he cannot. Okay. Well, then that's something you need to talk to your estate planning attorney about other ways to,
00:11:11
Speaker
Yeah, how do I make sure he doesn't get everything at one time? Well, that will be something we're going to talk about assets going into a trust, and then we need to have a trustee, and then we need to make sure whatever those assets are, if they are things that are typically designated outside of a will or trust, such as the aforementioned assets, life insurance, aduities, retirement investment accounts, then that those beneficiaries will actually feed into that trust to go for him.
00:11:41
Speaker
The other thing though, is that, yes. With beneficiaries, what if I just want him to get like some items? What if I don't want to funnel any kind of funds to him? What if it's like- If it's personal effects, then you can designate personal effects, whether it's a ring,
00:12:04
Speaker
stamp collection, furnishing, your stupid snake, whatever it is. but this What about my candy dispenser? So that's stuff that doesn't have a legal title on it. So you can either put that into whatever estate planning document you have,
00:12:24
Speaker
Or you can do a separate document as a guide to your executor hoping that they'll honor it. But if you've got a bunch of worthless shit like you're talking about, then I would say just put it in the Miranda Andy dispenser and not worry about what not worry about life. Like out of that life is not worth anything to you.
00:12:45
Speaker
Your snake's life is not worth anything to me. And I did not think that was something that is earth shattering. Tay-Tay doesn't deserve that. He's a living creature. No snake's life is worth anything to me. He had a hard life at the beginning. And we had to nurse him back to health. And now he's moisturizing and thriving and staying in his lane. Moisturizing and thriving. Oh, he really has a choice to stay in his lane.
00:13:08
Speaker
He does try to escape. Oh, I think moisturize and thriving is there's something to that. I don't know if it needs to be like cross stitched on something, but it's something that can. Yeah, I mean, I think if someone asks me like how I'm doing, and I'm going to start saying I'm moisturized and thriving. I incidentally am very moisturized because I have a slight obsession with motion.
00:13:35
Speaker
Oh, I know. In fact, I have, oh, it's only one. I have one bottle of lotion that is right here at the ready. I have probably three or four containers of lotion in my desk. Very, that a very particular a gift. I'm not your secret Santa, but in case the secret is exactly what somebody would say. No. Yes. hear secret is exactly something that your secret Santa would say.
00:14:08
Speaker
I promise I'm not your secret, Santa. But, Sam, you shouldn't say that because by process of elimination, you're just like starting to think that. Yeah, because I already kind of know who some people have on accident, so now I get to process them and eliminate them. Well, don't do that. I can't help it. Are you telling me not to think? i i I will say I am so excited about who I got as my secret. Well, not as my secret, Santa, who I get to be the secret Santa for.
00:14:38
Speaker
that I immediately ordered something and it arrived yesterday.
00:14:44
Speaker
It's gonna take everything inside of me to not give this gift ahead of time. Do you need to give it to me and Gabby so we can hide it away so you can't give it to them? No, because then you'll never forget it. What if you're the one, Sam? Or what if Gabby's the one? See, I'm not as careless as you.
00:15:08
Speaker
True, I mean. No, although Kimberly unwrapped it and left it in my little section in the kitchen by the Keurig. And I do wonder what her thought process was when she saw this item. And it's like no questions asked, which is just reason 101 that this is the perfect marriage, because it's pretty, and it it's a conversation starter. Let's just say that. and she I need to know what this is.
00:15:39
Speaker
What, Sarah? I need to know what this is. Anyway. find out and You all all will be revealed on December 17th. Yeah, about a month away. Damn, we still got a month. We'll forget about it. Yes. No, Sarah won't. She's like a goldfish. Anyway, i I do. I wonder. Here's what I wonder. I think Kimberly probably just assumes it's something I got for myself, which is hilarious. Yeah, probably.
00:16:08
Speaker
No questions asked. Her concern was just to unpack the box and put it in our box of recycling, because that is one of the things in her lane in our household, is recycling cardboard boxes. And that was probably her main focus. And as unique as this thing is, she probably took one look at it and questioned nothing. She said, not my business and moved on.
00:16:35
Speaker
it' like i So this is so on brand. I really do think she probably assumes it's for me. Nice. Because it does look like something I would want. And I'm not saying I don't want it, so maybe I won't even give it to whomever was picked for me. Gabby knows because she had to pick for me. Anyway, we digress, although someone will be the beneficiary of my gift.
00:17:08
Speaker
at that, bringing it back. So I do want to talk also um about bank accounts in particular, because those can be a little messy. and Oh, I know what I was going to also mention before Cynthia so rudely interrupted me is asked for contributions.
00:17:30
Speaker
I did ask if we had questions. You asked. But do I mean it? Do I mean it? No. You know, sometimes we want to be hopeful. Sometimes we want to have hope. So I do want to make sure.
00:17:44
Speaker
that no one also does the following, because this is also a big mistake people make, is if they name is their beneficiary or they add someone to a bank account or something like that, the person that they trust to handle everything. So naming a direct beneficiary of the person who you want to be trustee for your kids, or naming your oldest son, because he's your executor, but you actually want everything to be divided three ways.
00:18:12
Speaker
Um, this is a huge problem because when you name the person Then in the eyes of the law, whatever that is life insurance bank account is one 100 percent theirs It's not something that's going into your estate That's going to help pay for expenses and then it's going to be divided up according to your wishes It goes 100 to the person you name now of course you all can put your own thoughts together on whether you can trust someone to actually honor those wishes. I sometimes still live in a very Pollyanna world that you that there are people you can trust and they would follow your wishes. But just know that's something that is also an issue with this is can you trust them to actually then divide it or distribute it the way you want.
00:18:56
Speaker
But let me go with the bigger things that concern me is that one, in the eyes of the law, like I said, that's theirs. So then if they were to then to turn around and divide it to other people, if it's cash, money, that sort of thing, then they could be running against gift tax because they're actually it looks like they're giving a gift of that to somebody else.
00:19:17
Speaker
The other thing when you're naming, let's go back to the six year old child. I've named my sister as the trustee. So we already established bad idea to name the six year old. And even though I told you, you should be naming the trust. You're like, Oh, forget that. That's, I don't even know how to spell testamentary. Um, Sarah, do you know how to spell testamentary?
00:19:37
Speaker
I do. Thank you. Thank you. So you're like, forget it. I'll just name my sister because they're like, oh, you're saying name the the trustee. So I'm going to name the sister.
00:19:47
Speaker
Well, again, eyes of the law, then that asset's completely the sister's, gonna go ahead and allow you to presume that they'll use it for your child, but that's also considered a personal asset of theirs. So if sister gets sued, filed for bankruptcy, any of those things, then all the money that they're supposed to be trustee of for your kid is subject to all of that.
00:20:07
Speaker
The other thing is what if sister dies before kid hits that threshold, let's say 25. Who, where is that money going to go then? How's it going to be continuing to be continued to be used for your child because it's an asset of theirs. So whatever their estate plan says or doesn't say as 70 plus percent of people have, um, it goes according to that. So also a big, big mistake.
00:20:31
Speaker
um So before we completely devolve and fall off the rails with Sam and Sarah, I do want to talk a little bit about bank accounts and setting those up. And I'm really just going to reiterate what I said, but I do want to do it.
00:20:46
Speaker
couched in the difference with with bank accounts. so Keep in mind, if you've got a checking savings account on and you're like, oh, I'm just going to add this person to it as like a joint owner, all those same issues are on the table. If they were in a credit report, they get sued, filed for bankruptcy, now that account that you added them to that has your money in it is considered an asset of theirs.
00:21:08
Speaker
a And again, if you have them as a POD, transfer and death, all of that, then that's money that's personally theirs. It doesn't go into the state to help pay expenses and there's no obligation for them to distribute it to multiple beneficiaries that you've named. um Or if they do, then there's gift ta gift tax consequences. So the takeaway of all of this is that there are a lot of different ways that you can set up bank accounts, title bank accounts, set up beneficiaries on life insurance retirement investments and so forth.
The Role of Holistic Estate Planning
00:21:40
Speaker
And there's no one size fits all.
00:21:44
Speaker
in doing this. And that's one of the biggest reasons why it's so important. And I always, you know, I always clarify law firm with qualified law firm because look, there's some out there that probably an online will is better than them. And that's just the sad fact of it. But the good news that we have for all of you is if you go to birch-law.com, we have a checklist that you can look for when you are looking for a firm. And even though we are specific to Texas, I would say that that checklist is probably a good way to pre-qualify a law firm in whatever state that you're in. Like these are the things that you should be looking for. And lo and behold, one of them is asking them, do you help guide us on how to set up our beneficiaries and to what extent do you support that process as far as do you help fill out forms? Do you talk to financial advisors? Do you do all of that?
00:22:37
Speaker
So, that's really a huge piece of the value because the fact of the matter is, at least with um you know the everyday people from all walks of life, the the middle class that we deal with, because a lot of the estate planning firms are focused purely on um the uber wealthy and all of that, and that's great. you know they They need the help too.
00:22:57
Speaker
But we really cater to the masses. So for a lot of them, the most they have that would be generated when they pass away is controlled by beneficiaries. Because you know I made the ah reference earlier that you know you might have a home that barely has any equity.
00:23:13
Speaker
But you've got maybe through work, a retirement, or a significant amount of a life insurance policy. That's money you're not living off now. But if you passed away, you've generated a lot. So the so the majority of money and assets that will be generated when you pass away and may not even be controlled by your will or estate plan. And that's why you need to make sure that you get that guidance on how to set those things up to think holistically about how things are going to go down when things go down.
00:23:44
Speaker
or how things go down when you go down. Maybe that means to be a tagline or in one of our, how will things go down when you go down?
00:24:02
Speaker
yeah oh Right? So the theme today is beneficiaries. and all about beneficiaries and beneficiary designations. And i've I've had a little bit of a hectic day. I have not been able to see what Sam and Sarah have prepared to coincide with this theme. So without further ado, Sarah and Sam, what do you have to talk about when it comes to beneficiaries? so Yeah, we have.
00:24:37
Speaker
who you should not name as your beneficiary. Oh, intriguing. Okay. So I'm very curious. Oh, I am. Okay. Good to know. Thank you. I thought you all had started to work this out. They don't do that. I messaged you. Did you? You did not say at any point.
00:25:03
Speaker
that I would listen to. I promise. ah Sarah, quick point of clarification. I don't ever listen to the podcast because I live it. Do you ever edit this out? Oh, she did too. Whoops. Typically no. Why would she? It's part of the the shtick now. Yeah.
00:25:24
Speaker
She did infect message me. She did it in between multiple messages that I just skipped over it. Skipped over it. Okay, so first up, Sam and Sarah. Like, if you wanna know what's on there, we're not gonna be mad. So we shouldn't be, why? You don't know us. Oh. What?
00:25:49
Speaker
but What if someone does know you? What about your family members? Well, I mean, i I would hope that they would appreciate it. I wouldn't say no. They probably have other listeners listeners should not. You're so you're saying complete strangers should not name you all as beneficiaries because they don't know you. Correct. Excellent. I can't see. I can't wait to see where this goes now.
00:26:13
Speaker
Um, the next person you should not name as your beneficiary is your situationship that lasted two weeks and then ghosted you. Very true. Yeah. That's fair. Uh, next up is Taylor Swift. Um, we love her, but she's rich enough. She doesn't need you. Oh, so it's because she doesn't need it. Yeah. I do. I was about, I was about to be angry.
00:26:39
Speaker
Well, not necessarily for you, because I don't know if you could answer it, Sam, but could you just, for fun, name a celebrity as a beneficiary? I know you could do charities, but like... So is this a question for Sam? No. I would hope not, because I don't know. Is it a question for me? You said not for you and you really need to clarify, hun. Sorry, I meant not for Sam. Okay.
00:27:02
Speaker
Um, most forms that require you to name a beneficiary, you have to put their social security number, and address and so forth. So that is it that does pose an interesting question. And see if you can get that information. That'd be great. Okay, cool. Next up Sarah, huh, man, can't believe I put this. Next up, you should not name your gynecologist.
00:27:33
Speaker
I had questions all day. Yeah. What made you think of it? I was thinking doctor and it just immediately just... So is your thing people who don't need money? No. Just keep your name.
00:27:51
Speaker
Well, I mean, me and Sarah need money, so we're not going to go. Your situation should be about two weeks, probably needs money. Yeah. Yeah. So what what is making you think that your gynecologist does not deserve any of your money?
00:28:10
Speaker
Just the relationship, it's it's weird. It's your doctor.
00:28:23
Speaker
That's what I got with those questions. thank you absolute si I have so many things that I can add, but I'm not going to push it that far. Thank you. Sam? Next up, of who you should not name as your beneficiary, your cat.
00:28:52
Speaker
And why not? Why? Because they're not human and don't know how to spin it. What? Or have you got to differ? Turnip could figure that out. Well, turnip see, except for pretty much everything.
00:29:06
Speaker
All right, step is your therapist. Don't name them as your beneficiary. Why? They know too much.
00:29:17
Speaker
So I it's taking me a long time through this list, but I've I've discovered that we should probably stop and restart and just let this be rapid fire because asking you why takes away from this because you have actually no rational basis for these things that you put. Yeah. Okay. So, all right. I want to stop. Okay. And you don't necessarily need to edit this out because if anything, I would not. All right. Let's start from the top rapid fire. Who or what you should not name as your beneficiary. Go. First up, me and Sarah.
00:29:59
Speaker
Your situationship that lasted two weeks then ghosted you. Taylor Swift. Your gynecologist. Your cat. Your therapist. The stray cat you feed every three days who's clearly not a stray cat and has a family. Santa? Your emotional support rock.
00:30:20
Speaker
and That was much better. We definitely should have done rapid fire from the get-go. I think that's the first time we've successfully rapid fired. I think it is. Yeah. Well, it's definitely the first time I understood the words you said um the first time, Sam. Thank you. The little lady is her reaction was, oh.
00:30:45
Speaker
That's fine. Sam, have you ever noticed that Sam always says thank you to the things that I say? She does. I'm always like, that's an interesting take. Because they're usually not completely nice. Yeah. Positivity is my number six.
00:31:04
Speaker
And also my number six. Wait, are you saying top six? Yeah, we have the same top six, not just top five. I think it's so freaky.
00:31:15
Speaker
So there you have it folks. Those are all the people, things, or scenarios. i I'm personally offended that cats made it twice. There's two different types of cats, but apparently you should. have it
00:31:34
Speaker
Don't name them as beneficiaries. Who should you name as beneficiaries? Consult your favorite estate planning firm and they will guide you the right way. first off is a sponsor. Thanks for listening. And just to cover all our bases about what you just heard, I'm sorry and you're welcome. Make sure you subscribe so you never miss an episode and tell your friends about us. We do webinars and live events.
Engaging with Our Podcast
00:32:04
Speaker
The best way to stay up to date is to follow us on Instagram, Facebook, TikTok, and YouTube. Links are in the show notes. If there's a topic you'd like us to cover, maybe you have a question you'd like us to answer, or maybe you just wanna say hi, hit the link in the show notes or go to birch-law.com forward slash podcast and fill out the contact form.
00:32:34
Speaker
much better. Yeah I thought that had a lot of energy.