Chapter 2 Your Beneficiaries

• Library: Estate Planning Basics (Nolo) (2022 Ed.)

CHAPTER 2: Your Beneficiaries

Direct Beneficiaries

Alternate Beneficiaries

Beneficiary Complexities

Second or Subsequent Marriages

Unmarried Couples

Same-Sex Couples

Unequal Distribution of Property

Shared Gifts

Long-Term Care for a Child With Special Needs

Irresponsible Beneficiaries

Placing Controls on Gifts

Pets as Beneficiaries

Simultaneous Death

Disinheritance

Talking It Over

Consider Discussing Your Plan

Talking as Part of the Planning Process

Here we reach the core of estate planning: deciding who will receive your property after you die. This can be a satisfying part of the estate planning process, enabling you to contemplate the benefits your property will bring to the people or organizations you choose. When it comes to naming beneficiaries, you are free to make whatever decisions you wish, except that if you are married, in most states you must leave at least half of your property to your spouse.

For estate planning purposes, beneficiaries can be divided into two groups, depending on the rights you give them. "Direct beneficiaries" receive your property outright. "Alternate beneficiaries" receive property only if the direct beneficiary for that gift is not alive when you die. Below we'll take a closer look at beneficiary types, as well as possible beneficiary complexities.

Direct Beneficiaries

A direct beneficiary is a person or institution you name in a will, trust, or pay-on-death account to receive a gift of specific property. For example, if you leave your car to your daughter, she is a direct beneficiary. You can have as many different direct beneficiaries, for different gifts, as you choose.

Definition: Gifts
You leave your beneficiaries some type of property. I call this leaving them a gift. Lawyers often use words like "bequest" or "legacy." (The latter defined by Ambrose Bierce as "a gift from one legging it out of this vale of tears.") Of course, the word "gift" can also be used to mean property freely given from one living person to another, or to an organization. (For more information, see "Making Gifts During Life," in Chapter 10.)

Direct beneficiaries come in two types:

• primary beneficiaries—people or institutions named to receive specifically identified property, and
• residuary beneficiaries—people or organizations named to receive any property not specifically left to primary beneficiaries.

EXAMPLE: In her will Kira leaves her car to her friend Alice, her jewelry to her friend Dori, and $10,000 to the Sierra Club. All these are direct primary beneficiaries. She leaves all other property subject to her will to her brother Tom. He is her direct residuary beneficiary.

CAUTION

Special rule for Floridians. The Florida Constitution (Art. 10, § 4) prohibits the head of a family from leaving a family residence to someone other than a spouse or minor child, if either exists. See a lawyer if you have questions about how this law applies to you.

As mentioned in Chapter 1, many people's beneficiary situations are relatively simple. Even if you want to name many different beneficiaries for different specific items of property, your beneficiary plan can still be simple. As long as you clearly set out which person gets which item, there should be no trouble. Other people, however, don't have it so easy. Complicated questions may arise about possible beneficiaries. But before discussing these complexities, let's look at one concern you should address no matter what your beneficiary situation: whether to name alternate beneficiaries.

Gifts to Caregivers in California, Illinois, or Nevada
If you live in California, Illinois, or Nevada and want to leave a substantial gift to any nonrelative who has recently helped you with personal or health care, see a lawyer first. You can leave such a gift—but first you may need to have a lawyer sign a statement, verifying that you're acting freely and aren't being unduly influenced.
If you don't, the gift could be void—meaning the intended recipient won't get it. These states have laws that aim to prevent caregivers from taking advantage of the people who depend on them. However, the laws could easily invalidate perfectly reasonable gifts that you really want to make. For example, a gift to a new neighbor who brings meals and helps you pay bills could be voided, as could a gift to a paid live-in caregiver who has become a good friend.
These laws apply only to gifts greater than:

• $5,000 in California (or less if your entire estate will be worth less than $166,250)
• $20,000 in Illinois, and
• $3,000 in Nevada.

Most gifts to family members won't be affected, but gifts to loved ones who are not legally related, like stepchildren or unmarried partners, could be voided if your will is challenged.
If you think these laws could void gifts that you want to make, see a lawyer who handles estate planning, family law, or elder care matters for help.
(Cal. Prob. Code §§ 21380-21392, 755 Ill. Comp. Stat. § 5/4a, Nev. Rev. Stat. Ann. §§ 155.093-155.098.)

Alternate Beneficiaries

An alternate beneficiary is a person or organization you name to receive a gift you left to a direct beneficiary, if that direct beneficiary dies before you, or does not outlive you by a defined period of time chosen by you, often 30 to 45 days. (This is called a "survivorship requirement.") You can name one or more alternate beneficiaries for every one of your direct beneficiaries. Commonly, spouses who leave all of their property to each other name their children as alternate beneficiaries. Other alternate beneficiary plans can be more complex.

EXAMPLE: Howard decides to leave his property equally to his brother, Al, and sister, Sheila. Howard also decides that if Al dies before him, Al's share of the property should be divided as follows: 25% each to Al's three children, and 25% to named charities. If Sheila dies before Howard, he divides her share this way: 50% to her daughter, 25% to named charities, and the remaining 25% to a political cause.

When preparing your will or living trust, should you name alternate beneficiaries? The conventional estate planning advice is that you should—indeed must. I disagree. Generally, naming alternate beneficiaries is wise, but it's not necessary to name them in every situation.

If there's a reasonable chance that a primary beneficiary will not outlive you, for instance if the beneficiary is elderly or ill, it's surely sensible to name an alternate. Of course, you could amend your will or trust to name a new beneficiary for property left to someone who predeceases you, but naming alternates will save you the work. Also, it eliminates the risk that you won't be able to amend your will or living trust—or that you simply won't get around to it. Better to name alternative beneficiaries so that you have a plan in place from the get-go.

So why would someone decide not to name alternate beneficiaries? Because naming alternate beneficiaries means considering a horrible event—someone you love dying before you do.

EXAMPLE: Demitrous, a widower, leaves all of his property to his daughter, Irene. He refuses to contemplate her dying before him, and does not name an alternate beneficiary. The risk is that if she does predecease him, and he doesn't name a new beneficiary, his property will be distributed to his closest relatives according to state law, which might not be what he wished.

The example above is an extreme case, because there is only one beneficiary and no backup. Most people don't put all their eggs in one basket, so a...