Beneficiary Designations in Estate Planning

Recently, I have been helping an Executrix settle her uncle’s estate.  She was his “favorite niece” and his Will provided that she would receive his entire residuary estate.  The Will also provided that any inheritance taxes to paid as a result of his death would be paid by the estate.  Everything would have gone according to the estate plan set forth in the uncle’s Will, except that after making his will the uncle decided to leave two of his tax-qualified IRA accounts to a new friend by way of beneficiary designations on these two accounts.  This was his absolute right.

However, in doing so, he completely negated his estate plan set forth in his Will.  In this regard, accounts with beneficiary designations pass outside of the Will and go directly to the designated beneficiary.  Moreover, when the testator’s will includes a provision that any and all taxes arising by virtue of the decedent’s death are to be paid by the estate, it results in the estate paying the associated inheritance tax on money received by the designated beneficiary regardless of whether he or she is a beneficiary under the decedent’s will.

The consequences of beneficiary designations on accounts, therefore, can be quite profound.  In the above mentioned estate, most of the estate assets were comprised of the two IRA accounts.  There was a small checking account that went into the estate and a home that had a substantial mortgage on it.  Fortunately, there was enough in the net probate estate to pay the inheritance tax on the IRA accounts that went to the friend who was not mentioned in the Will as a beneficiary.  Unfortunately, the “favorite niece”, who had to do an incredible amount of work to get the house ready for sale and do other estate administration tasks, received a small fraction of the overall estate value.

Accordingly, it is very important for anyone using beneficiary designations to be mindful of how this will affect his or her overall estate plan to guard against unintended consequences. 

For more information regarding this area of very complicated area law, please feel free to contact me, Attorney Steven R. Blair, at (717)390-2030.  I have been a Lancaster County, Pennsylvania lawyer for over 30 years