Update: The implementation date for the "look back" has been extended from July 1, 2021…
When was the last time that you checked the beneficiary designations on your bank and investment accounts, your retirement accounts, or your insurance policies? Upon opening an account or purchasing an insurance policy, and having named a beneficiary (or not), many people never give the subject another thought.
Unfortunately, years later, the choices made earlier on may no longer make sense, and they can produce unintended and undesired results. Your Elder Law attorney will ask you about your beneficiary designations because your choices can dramatically impact planning for long-term care, as well as estate planning.
Let’s take a look at a few examples of how an ill-considered beneficiary designation can cause mischief.
It is common for people to name their spouses as beneficiaries of retirement accounts or of insurance policies. While this approach makes sense from an estate planning perspective, what happens, for example, if the wife needs “ruinously expensive” long-term care services, and applies for Medicaid benefits? In this case, if the husband should pre-decease the wife, the wife’s receipt of the husband’s retirement assets or the proceeds of his life insurance would cause her to lose her Medicaid benefits. A more prudent plan would have been for the husband to change his beneficiary designations when the wife obtained Medicaid. The new beneficiaries might be children or other family members, or a trust.
Another common example is the husband who names his wife as beneficiary of his retirement account or insurance policy, and then the wife pre-deceases him. By default (unless he has named a contingent beneficiary) his estate becomes the beneficiary. Later on, he needs long-term care and obtains Medicaid benefits. When he passes on, his belief that his heirs will benefit from his savings or insurance goes unfulfilled. Instead, Medicaid exercises its right to recover its costs of care from his estate, which now contains the proceeds of the retirement account or insurance policy. Again, a more prudent approach would have been to update his beneficiary designations when he obtained his Medicaid benefits, so that his heirs would in fact receive the proceeds.
In the preceding example, even if Medicaid or other government benefit programs were not in the picture, the failure to update beneficiary designations would have an unfortunate consequence for the heirs. Instead of receiving the proceeds directly and by-passing probate, the heirs will be forced to become involved with probate of the estate, with all its attendant legal costs, frustrations, and delays.
Another frequent situation involves parents who have an adult disabled child, and want to provide for his or her financial needs after they’re gone. If the child currently receives Medicaid or Supplemental Security Income (SSI), and is made a direct beneficiary of either parent’s estate, the child’s government benefits will be disrupted. Medicaid or Social Security will insist that almost all of the money be “spent down” before benefits can be reinstated. However, if the parents had set up a Supplemental Needs Trust, and had designated the trust as the beneficiary of their accounts or insurance policies, this entire problem could have been avoided.
Beneficiary designations are a complex topic, and the best strategies sometimes have a lot of moving parts that have to be precisely synchronized in order to get the most advantageous outcome. We’ve only just scratched the surface in this discussion. It will be to your best advantage to get an opinion from an experienced New York Elder Law attorney if you have any questions concerning your beneficiary designations.
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