Don’t Make These Costly Beneficiary Mistakes When Writing Wills

Doreen was making her first will after her divorce. She thought she knew who to leave everything to.

I asked her, “What happens if a catastrophe occurs? What if a beneficiary dies before you or with you? Who are your backup beneficiaries?”

You likely know who your beneficiaries are. But who would be your backup beneficiaries?

Confirm Your Final Wishes in Wills

When it comes to your final wishes, you do not have a free hand. Your legal obligations can stop you from doing whatever you want. Courts can claw back your money if you make mistakes.

Your executor pays your debts including your taxes. After your bills are paid and specific gifts distributed, what’s left? That’s your estate remainder or estate residue. Let’s discuss what you do with your residue.

It may be obvious to you what to do with your residue. You know who you want to benefit or cut out of your estate. Things are not always that simple. Is it really your money anyway? You should avoid the costly mistakes that I cover next.

7 Costly Beneficiary Mistakes to Avoid

When you prepare your wills, don’t make these beneficiary mistakes:

1. Do not ignore your spouse

Married spouses have rights to share matrimonial or community property. Partners, same-sex or common law, can also have property and support rights. Their rights vary in each jurisdiction. You can’t ignore your spouse’s entitlements. This mistake leads to will disputes and lawsuits.

Spouses who are not adequately provided for can enforce their legal rights. All of their legal fees likely are paid by your estate. That is a double whammy. Get legal advice before cutting out spouses, even common law spouses.

Doreen also needs to review her divorce agreements before making her will. She may have obligations (insurance, support, etc.) towards her spouse.

Your will needs to follow any prenup or post-marriage contract you signed. Such contracts can specify what your obligations are. They can also confirm your spouse has no claims to your estate. Use such contracts if you are entering a second marriage or common law relationship.

If your contracts define your spousal obligations, your will must reflect your “contractual obligations.”

2. Do not treat children unequally

All children would share in your estate unless special circumstances exist. You risk leaving lifetimes of pain for children feeling unfairly treated. You may treat them unequally while you are alive.

Paige lived with her parents and took care of them. Her parents may be justified in giving her their home. They should tell other family members what they plan to do. Relatives should not be caught by surprise.

By the way, there is no formal reading of your will. This only happens in Hollywood movies for dramatic impact. If a person is not named in your will, they usually get no official notice. If your will is probated, it becomes a public document. Anyone can see what’s in it.

With blended families, this rule may be impossible to apply. You may have financially independent adult children from prior relationships. Your three-year-old twins from your current marriage are in nursery school.

Who gets your money?

You may only have moral obligations to financially independent adult children. However, the twins have superior legal rights to support as dependants. That is a legal obligation the law says you cannot ignore.

What do you do for your adult children? You need advice on your options to benefit children from previous relationships. Life insurance may be your best option.

3. Do not forgot to protect minor children

Minors can inherit but not control their inheritance. Your twins’ inheritances, if they are minors, must be paid into court. You can change this in your will. You can create trusts to manage money for minors.

In your will, you can also name trustees to hold minors’ inheritance and guardians to raise them. These persons can invest and control payments to your twins for their education and welfare. These gifts are held in trust.

4. Do not pass up tax credits to charity

After you take care of loved ones, you can be generous to charity. You can remember those who helped you or need your help. Life insurance benefits, cash, real estate or antiques can all be donated.

Advice from your favourite charities will help you take advantage of tax credits. Make sure you have the proper legal name for all charities.

5. Do not forget to name backup beneficiaries

Deal with contingencies in case your beneficiary dies before you. Cover yourself with backup beneficiaries to avoid extra expense. Otherwise, courts may need to determine who gets what.

6. Do not forget those with special needs

Louis had been unable to work or take care of his money. His parents realized he would need help with any inheritance. They set up a trust for Louis under their will. Their trustees held his inheritance. All benefit (money) from the trust goes to Louis. If Louis passes away, the balance in the trust fund can go to his siblings or charity.

Beneficiaries on government assistance may need special discretionary trusts. You may require expert advice to prepare these trusts.

7. Do not cut someone out improperly

Planning to disinherit a child from your estate? Make sure you see an experienced will lawyer. Each jurisdiction has laws that recognize children’s moral and legal rights. Do not leave a legacy of bitterness because you weren’t invited to a child’s wedding. Make sure your reasons to disinherit are legitimate.

Lawyers can record your reasons. They can be expert witnesses to defend your decisions. This is another reason to have lawyer prepared wills. They can confirm you are not violating public policy rules. You cannot rely on offensive grounds or include them in your will. Hopefully, they will never have to explain them to judges in court.