Louis N. Teti, LL.M.

Our June newsletter included my article entitled the "Top 16" List of Common Misconceptions in Estate Planning. Here is a further analysis of Misconceptions #6 and #5.

Misconception #6:
"I'm not worried about beneficiary designations on my life insurance and retirement benefits. I think I named my husband, and I don't need to be concerned about the 'contingent' beneficiary."
Beneficiary designations on life insurance policies, annuities, retirement benefits, and other similar assets are critically important ingredients in a client's overall estate plan. A "beneficiary designation" is a form that is signed by the owner of an asset (or insurance policy), stipulating how the particular insurance proceeds or asset will be distributed upon the insured's or the owner's death. On most beneficiary designation forms, there is a place to name a "primary" beneficiary, as well as a "contingent" or alternate beneficiary. Some forms even provide for a second contingent or alternate beneficiary.

In earlier columns, I have written that there is no such thing as a "simple Will." One reason for this is that in order to do a thorough, comprehensive and effective review of a person's assets, it is critically important that the person review whom he or she has named as the primary and contingent beneficiary on each life insurance policy, annuity, retirement account (IRA, 401(k), etc.). These types of assets are generally controlled by a beneficiary designation. Clients are frequently surprised to learn that a primary beneficiary designation controls the disposition of a particular asset, as opposed to a person's Will. As an example, assume that a client signs a Will giving all of her assets to her daughter and son in equal shares. Further assume that the client has a $500,000.00 life insurance policy, under which she executed a beneficiary designation naming her mother as the primary beneficiary. Despite what the Will provides, the insured's mother would receive the life insurance proceeds, not the insured's children. Clients frequently forget that they have ever signed beneficiary designations, and are usually slow in reviewing and updating these designations from time to time. An obvious time to do this is when the client is preparing a Will with estate planning counsel.

As far as charging for a Trustee's services, the old adage of "getting what you pay for" applies here. Many times, an individual family member appointed as Trustee is busy with his or her own life but feels a moral commitment to fulfill his or her duties as the Trustee. This is frequently not a good decision, and it would be better if the Trustee who is appointed has the time and ability to effectively fulfill the role of Trustee. Clients frequently shy away from appointing a corporate fiduciary such as a bank, brokerage company or trust company, but, in many situations, a corporate fiduciary is the better option. Although there are personnel changes from time to time at these institutions, a corporate fiduciary provides objectivity, professionalism, and investment expertise and experience when serving in this important fiduciary position.

There are also "Transfer on Death" beneficiary designations which have become popular recently with banks and brokerage institutions. Similar to a beneficiary designation on life insurance and/or retirement benefits, a Transfer on Death designation has the same effect on assets such as bank accounts and/or brokerage accounts. If a person decides to execute a Transfer on Death beneficiary designation, it is critical that he/she consider the impact this designation has on his or her overall estate plan, and, more importantly, that the designation is consistent with the intentions outlined in his or her Will, trust, or similar estate planning document.

Don't take beneficiary designations for granted!! They are a critically important component of your estate plan, and you must regularly review them to make sure that your intentions are accurately stated. Take some time to review all of the beneficiary designations (primary and contingent) on your current life insurance policies, annuities, retirement assets, and other assets which might be controlled by these types of designations. Such a review will avoid headaches, heartaches, and unintended results down the road.

Misconception #5:
"I don't need a Durable Power of Attorney. My daughter takes care of all of my finances, so I added her name as a joint owner on all of my accounts. She knows that when I die, it all gets split four ways among her and her three sisters."
Every client should consider the execution of a Durable Power of Attorney, which is a document that enables a person (the "principal") to appoint someone to serve as that person's agent or "attorney-in-fact" to effectuate and transact that person's affairs during the principal's lifetime. A General Durable Power of Attorney is effective the moment that the "principal" signs it, and the agent is authorized to act on the principal's behalf at any time, regardless of whether or not the principal is disabled. A "Springing" Power of Attorney stipulates that the document is valid only upon written proof that the principal is physically and/or mentally unable to manage his or her own affairs. One might be quick to assume that most people will want a Springing Power of Attorney; however, I usually recommend to clients that they sign a General Durable Power of Attorney. In order to be effective, a Springing Power of Attorney requires that one or two physicians provide some sort of written certification that the principal is unable to transact his or her own affairs. It might be difficult or time-consuming to obtain such a certification down the road, and the very reason that you execute a Power of Attorney may be circumvented by this hurdle. A General Durable Power of Attorney avoids the need for time-consuming, agonizing and costly court proceedings to have a guardian appointed for the principal. When there is no Power of Attorney in effect, the family is required to seek the appointment of a guardian by the appropriate court. You should name someone as your attorney-in-fact in whom you have the utmost trust. If you name such a trusted individual in this capacity, then there is little likelihood that the attorney-in-fact will abuse the powers granted to him or her under the General Power of Attorney document.

Now let's consider that person who names her daughter as the joint owner on all of her accounts, anticipating that upon her death the daughter will "do the right thing" and split the jointly-owned asset four ways with her three other siblings. As a general rule, it is not wise for a client to add a child's name to an account for "convenience" purposes. Adding the child's name to the account means that the child is now an owner. If the child dies first, the jointly-owned asset will be in the child's taxable estate, and it is possible that the parent will have to pay some amount of state and/or federal death taxes in order to "get the asset back." A much better alternative is to name the child as the mother's attorney-in-fact, authorizing the daughter to transact all of the mother's business if necessary. A Power of Attorney can be executed in duplicate form, and copies of the Power of Attorney may be given to as many banks, financial institutions, etc., as are necessary to effectively transact the mother's business. The mother's name is still the sole name on the account, and, at death, the asset will pass to the persons named in the mother's Will.

Another risk that the mother runs by adding the daughter's name as a joint owner is that there is no guarantee that the daughter will split the asset four ways. Sometimes, even though a child may have good intentions, his or her circumstances may be such that it would be tempting to keep the asset and not divide it with her siblings. Sometimes the child could be influenced by a spouse or other family members and persuaded to keep all the assets that were jointly-owned, or alternatively, to divide them in some fashion other than equally among all children.

A "Durable" Power of Attorney remains effective even if the principal becomes incapacitated. Also, keep in mind that the Durable Power of Attorney is effective only during the principal's lifetime. It ceases to be valid upon the principal's death. At that point, the principal's affairs are managed by the Executor or personal representative and/or Trustee named under the principal's Will or Trust.

A Durable Power of Attorney is a critical ingredient to an effective estate plan. Review your existing estate planning documents, and if you do not have a Durable Power of Attorney (and Health Care Power of Attorney), contact your estate planning lawyer to put the wheels into motion to add those vital documents to your estate plan.

MacElree Harvey
17 West Miner Street
Post Office Box 660
West Chester, PA 19381–0660
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