Parents talking to their son about being their estate beneficiary.

March 20, 2019

How to Select, Protect and Communicate to Estate Beneficiaries

Couples often assume they will be of one mind when it comes to who inherits what asset after their deaths, and that the transfer of wealth to their beneficiaries will be relatively straightforward.

The reality, however, is that more often then not, partners who begin selecting beneficiaries and planning their estates soon discover there are a plethora of unforeseen complications and considerations involved.

Couples who have blended families, for example, may find themselves facing fundamental disagreements, such as who should be the beneficiaries of the estate or how much should go to each beneficiary.

Couples who are fortunate enough to agree on their beneficiaries may disagree on how and when to distribute their wealth.

And couples who haven't communicated their plans to their children may be shocked to discover those children's expectations around their inheritance are drastically different than the reality they're planning.

In addition to selecting beneficiaries, a complicated process alone, there are other major considerations that need to be thought through during this stage of the estate planning process, including where you live, the possibility of remarriage, how and when to distribute the assets, and communication plans.

These are a few of the critical considerations that could influence how you select — and communicate your intentions to — your beneficiaries.

Who Will Be the Beneficiaries of Your Estate?

It's often assumed by one partner or the other that their children will be the beneficiaries of the estate. But one partner may want to leave a portion of the estate to a charity or another significant person in their lives, such as a long-time household employee who helped raise the children.

Couples may also consider allocating a portion of their estate to grandchildren, specifically to provide for their well-being, education or medical needs.

No matter how you decide to allocate your estate — whether everything goes to your children or you divide your wealth among a larger group — it's vital to speak to your beneficiaries ahead of time.

“In general, in my experience, children often expect to receive 100 percent of an estate. That may not be what you give them but that is what they frequently expect," said Alma Banuelos, national head of Trust and Estate Services at City National Bank. "It's important that once you decide, especially with adult children, you let them know so that there's no hurt feelings or animosity. Preparing them ahead of time is the best way to ensure the transfer of wealth goes as smoothly as possible."

How and When Will Assets be Distributed to Your Children?

Once the question of what charities and non-family loved ones will be assigned as beneficiaries is addressed, many couples often choose to leave the remainder of their estate to their children.

However, even leaving your wealth to your offspring is rarely a straightforward process.

“A challenging question for parents is if their adult children are really in a position to be responsible for their own inheritance," said Banuelos. “If there is a concern that your children may not be responsible enough to inherit, for instance if they struggle with substance abuse or have gotten into trouble in the past, then couples need to ask who should be responsible for administering the funds for their adult children and for how long?"

Special issues can arise if your estate leaves assets to young children who have not reached adulthood.

“If they have minor children, couples have to ask themselves — and agree on — who should be appointed as their guardian," said Banuelos.

“You may suddenly find that you and your husband don't agree on the right person and it's important to work that out as early as possible," she said.

"Also, you both must decide who should be responsible for administering funds for those children. Really, the most critical part of that conversation is that the person you think is the very best caregiver for your children may not necessarily be the right person to oversee their funds. They don't have to be the same individual."

Have You Talked to Your Family, Children and Grandchildren about their Future Inheritance and How to Manage it?

Most benefactors have taken only initial steps to prepare for wealth transfer. According to RBC's Wealth Transfer Report, only 35 percent of inheritors report that they were prepared by their benefactors before receiving wealth.

According to the report, formalized financial education begins at age 27. However, people who began learning how to manage money earlier in their lives had a higher degree of confidence, with 66 percent of those who began before age 18 rating themselves as confident in their ability to manage their inheritance.

“I suggest starting family governance conversations with kids as young as 10 years old," said Joline Godfrey, a financial educator, author and CEO of The Unexpected Table. "Families should discuss things like, 'How do we make decisions? How do we make sure your voice is heard? How do we figure out the complex issues in this family in ways so that people feel that it's just and equitable?' Creating an open space for dialogue now can prevent a lot of trouble later."

Though there are no simple solutions to multi-layered family and wealth transfer issues, creating a safe space to discuss sensitive family issues like money and relationships can help prevent resentment and make future wealth transfers go more smoothly. “I'm a great believer in family communication," said Godfrey.

How Will State Law Affect the Way You Divide Assets?

Even when couples are aligned regarding who they want to inherit the bulk of their assets, they may not appreciate the unavoidable impact the law can have on their plan.

While familial and emotional bonds can play an important role in your choice of who receives your wealth and property, the law may possibly play a greater role, depending on where you live.

“The first thing couples need to consider when making a will is what state they reside in," said Banuelos. “The state you live in determines whether your assets are community property or separate property."

Depending on what state you live in, your spouse may have clearly defined rights that entitle him or her to a specific share of your estate.

For example, if you live in a common-law state — which is most of the country — any assets one member of a married couple acquires belongs solely to that person unless the property is specifically put in the names of both individuals. In common-law property states, spouses have more leeway with what they want to leave to their partners.

On the other hand, in community property states — including California and eight others — both partners are automatically entitled to half of the assets acquired during the marriage.

Have You Structured Your Estate to Protect Your Children's Inheritance in the Event of a Surviving Spouse's Second Marriage?

The spectrum of complexities and considerations that can arise around the transfer of wealth to children in blended families is also often one of the most emotionally challenging aspects of estate planning.

“Dealing with wealth issues and estate planning is hard enough with essentially happy, healthy, well-adjusted families or couples, but it becomes a much more complex arena if it's a blended family," Godfrey said.

“Suddenly you'll hear couples saying things like 'I don't feel you're treating my kids [from my previous marriage] fairly.' A spouse can have a lot of resentment they've been building up and never expressed before. So emotional issues come up in the estate planning process that should have come out in an actual therapeutic, much safer, setting. You thought you were just making a will but now a couple has to deal with previously dormant major family issues."

“A big point of contention can be whether remarriage is an possibility for the surviving spouse," said Banuelos. "The worry here is that if the surviving spouse marries and shares their estate with a new partner, then the children from the previous marriage may no longer get their fair share of the estate."

Although it may be uncomfortable for couples to discuss the possibility of remarriage, they can often agree that it's important to talk through the option for the sake of protecting the financial well-being of the children they've raised together.

Too often, couples don't prepare for this scenario. And when the surviving spouse does eventually remarry, the estate plan, along with the relationship with the new spouse, becomes complicated with the dynamics of transferring wealth in a blended family.

Have You Factored in How Blended Family Dynamics Will Impact Your Distribution Plan?

Whether you're remarried or you've become someone else's second or third spouse, previous marriages may also play a part in how the two of you approach your estate plans together.

Matters become more complicated if one or both spouses have children from a previous partnership.

“For example, children from a first marriage whose father has remarried may assume they are 100 percent their dad's heir and that if he passes away, they will inherit the entire estate," said Banuelos.

At the same time, the second wife assumes she gets to live in their home, receive a stipend and be cared for during the rest of her life.

"Frequently in estate planning, you have to grapple with two completely different expectations," she said.

It's these kinds of conflicting expectations that can cause chaos and foster family drama if they aren't addressed ahead of time with open communication among all affected parties.

"There are just so many complex issues that arise if either or both of the spouses have been married before," said Banuelos, once again highlighting the critical role communication plays between expectant beneficiaries and couples.

“In the end, topics like beneficiaries and previous marriages all need to be addressed openly and as soon as possible. The most important thing to remember is that a will is a living, breathing document; you can always change it, but you've got to get it started somewhere," said Banuelos.

Organize Your Estate and Define Your Legacy

We can help create and fully manage an estate plan that serves to preserve, grow and transfer your personal wealth while sustaining your family legacy. To speak with an advisor about wealth management strategies customized to your financial goals, fill out the form below. 

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This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations and readers should seek professional advice

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