Pre-Need
Life Insurance
Last Will & Testament
A Living Will
Payable on death
Right of disposition (Who has a right to do it)
Letter of Last Instructions


1. Pre-Need

Pre-need is planning a funeral before the time of death. It is an important part of your estate and retirement planning. Without pre-need, the details of the funeral are left to a small group of family members who have little warning or time to plan this major life event. Pre-need relieves your family of that responsibility. You are able to leave detailed instructions about your desires and wishes.

2. Life Insurance

Naming a life insurance beneficiary should be an easy and uncomplicated process. While it can be straightforward in many cases, there are a number of potential legal, financial, and tax-related problems that can occur if you don’t name your beneficiaries properly. Therefore, it’s important to find out how you can avoid making simple but potentially costly mistakes.

A Statistical Portrait of the American Family

Life insurance beneficiaries are frequently spouses and children of the insured. However, we live in a dynamic world in which the “typical” family may not be so typical. Consider these statistics about U.S. families:

  • In 2010, there were 2,096,000 marriages in the U.S.
  • In 2005, a report by the State of Our Unions said that 8.1% of all coupled households were unmarried heterosexuals.
  • The same 2005 report also showed that only 63% of all children in the U.S. live with their biological parents. This is the lowest in the Western world.

The person or people you name as a beneficiary is a choice only you can make, but it’s a vitally important choice.

Primary and Contingent Life Insurance Beneficiaries

How do you designate a life insurance beneficiary legally? There are two basic types of life insurance beneficiaries:

  1. Primary beneficiary: The primary beneficiary is the person (or persons) who will receive the proceeds of the life insurance policy when the insured person dies. However, the primary beneficiary will not receive any proceeds if he or she dies before the death of the named insured.
  2. Contingent beneficiary: This is also known as the secondary beneficiary. The contingent beneficiary will not receive any of the life insurance proceeds if the primary beneficiary is still alive when the insured person dies. The contingent beneficiary is only entitled to receive proceeds if the primary beneficiary dies before the named insured.

Many professionals in the industry feel that the best or safest approach is to name a primary beneficiary and a contingent beneficiary on a life insurance policy.

Revocable and Irrevocable Life Insurance Beneficiaries

There are two classes of beneficiaries known as revocable and irrevocable beneficiaries.

  1. Revocable beneficiaries: The owner of the life insurance policy has the right to change the beneficiary designation at any time without the consent of the previously named beneficiary.
  2. Irrevocable beneficiaries: The owner of the life insurance policy cannot change the designation of the beneficiary without the consent of the original beneficiary.

Which is the better choice? Most experts consider that the simplest way is to go is with a revocable beneficiary option. There are a number of potentially complicated legal issues that can occur if you opt to go with an irrevocable beneficiary.

Choosing a Life Insurance Beneficiary

How do you choose who should be your life insurance beneficiary? You should consider:

  • Family: One or more immediate family members who are dependent on you for both your income and financial support should top your list of potential beneficiaries. Your primary and contingent family beneficiaries can include your spouse or domestic partner, children, brothers and sisters, parents, or any other member of your family. It is up to you decide on the order of importance.
  • Legal guardian: If your named beneficiaries are minors (under the age of legal consent), the life insurance company may require that you name a legal guardian as the beneficiary. Alternatively, you can designate a legal guardian using the Uniform Transfers of Minors Act on their behalf instead of using a legal guardian. Note that even if you have named a guardian as beneficiary, the proceeds will not be paid until the court has specifically appointed a guardian or approved the named beneficiary as guardian for the minor(s).
  • Estate: You can choose your estate as beneficiary. The proceeds will go to the Executor or Administrator of the estate. This is the person or entity designated in the insured’s last will and testament, and who must be approved or designated by the probate court. However, you can only use your estate as the named beneficiary if you have drawn up a last will and testament, and must not name a specific person on the beneficiary designation of your policy. Be sure to discuss the tax implications of naming your estate as beneficiary with your accountant, financial advisor or insurance agent.
  • Trusts: A trust must be set up before you can designate one or more trustee and name the trust beneficiaries.
  • Charity: You can name a charity as either the primary or contingent beneficiary.
  • Key person life insurance: It is a common practice for a business to purchase life insurance on key personnel in the company. This form of life insurance may be owned by the company, in which case the business is typically the beneficiary of any applicable life insurance beneficiary policies. Or the business owner may buy a life insurance policy and name a co-owner as beneficiary, enabling the co-owner to purchase the policyholder’s share of the business if the policyholder dies.

What If You Want to Name Multiple Beneficiaries?

If you want to name more than one life insurance beneficiary, there are two approaches you can take:

  • Per stirpes: You can designate your beneficiaries by “branches of the family or lineage.” This means that the life insurance proceeds would be passed down to be divided equally among the beneficiaries and/or the surviving children of the beneficiaries.

Example: You, as the insured, designated your son (John) and daughter (Jane) as beneficiaries. Your son John dies before you do. If you were to pass away next, then Jane would receive 50 percent of the proceeds and the remaining 50 percent would then be apportioned equally to all of John’s surviving children.

  • Per capita: Simply put, the proceeds are divided equally among all the beneficiary survivors of the lineage line.

Example: Using the above scenario, suppose John had four children and Jane had no children when you, as the insured, passed away. This means that the proceeds would be divided equally between John’s four children and Jane. Since there are a total of five beneficiary survivors, each beneficiary would get one-fifth of the life insurance proceeds.

If you have multiple beneficiaries, it is best to designate that proceeds will be distributed as a percentage rather than a dollar amount.

Why? You might buy a $100,000 universal life insurance policy and apportion $50,000 to your two children as beneficiaries. But, when you pass away, the policy could be worth $120,000, and the insurance company will have no instructions on how to legally divide up the remaining $20,000. An unfortunate and avoidable legal battle could ensue for the remaining portion of your policy.

When Your Beneficiary Dies Before You and Other Concerns 

If your beneficiary dies before you do, you must rename the beneficiary on the policy as soon as possible. How do you do this? All you have to do is contact the life insurance company and request a “change of beneficiary” form.

If both the insured and beneficiary die at the same time, then the proceeds would go to the insured’s estate.

The “Dos and Don’ts” of Naming a Beneficiary 

Here are some things you should do and some things you must avoid when naming a beneficiary:

  • DO identify the primary beneficiary. This should include their full name(s), date of birth, and/or social security numbers.
  • DO designate percentages rather than specific dollar amounts.
  • DO include a secondary or contingent beneficiary in your policy.
  • DO re-visit your life insurance policies every few years to ensure the beneficiary designations are current.
  • DO amend your life insurance policy if your circumstances change, for example in the event of a new addition to the family, the death of a beneficiary or divorce.
  • DON’T name a beneficiary generically such as “wife,” or “spouse” or “children.” If you file for divorce and do not specifically name a designated beneficiary(s), there will likely be a legal battle for the benefits of your policy. Likewise, in the event that a family member becomes disenfranchised for any reason, you will want to ensure that your beneficiaries are specifically named.
  • DON’T forget to include anyone such as adopted children or grandchildren if you have named heirs as beneficiaries, contingent beneficiaries, etc.
  • DON’T use “estate” as beneficiary when you have specific family members that you want to receive the proceeds. If you name your estate as beneficiary, the proceeds will be become entangled in the estate probate and could cause potential tax issues. Your creditors will also be able to place their claims against the estate proceeds. Named beneficiaries get the proceeds of a life insurance death benefit directly.
  • DON’T name minors unless you have a designated guardian for the children.
  • DON’T have a separate owner, named insured, and beneficiary on a policy; it could result in tax problems. Example: You buy a policy for your son John and your policy names his spouse Julie as the beneficiary. If John dies, it is very possible that the IRS may view the proceeds as a gift from you (the owner of the policy) to Julie (the beneficiary) and they could tax the proceeds. 
  • DON’T name a creditor as a beneficiary.

Naming a beneficiary requires some thought. If you don’t put some thought into how you name your beneficiaries, your family and estate may face legal or tax complications. Always keep your beneficiary information current on all your life insurance policies.

3. Last Will & Testament

A Last Will and Testament states what will happen to your assets after death. This includes, but is not limited to, your estate, property, possessions, money and children. The consequences of not having a will are quite serious; the government will divide your property, regardless of your intended wishes.

Why should I have a Last Will?
You worked hard to earn what you have—your home, car, bank account—shouldn’t you express how it will be distributed after your death? Without a will, your wishes will be irrelevant, and the state will decide how to distribute your estate. Precious heirlooms, that you wanted to give to a friend upon your death, will be sold at auctions and the money will go to the government. Drafting a Last Will ensures your estate is handled according to your preference.

What should I know when creating a Last Will?

  • List your beneficiaries

Your beneficiaries are the people you want to leave your property to. You can also choose how you want your property divided amongst your beneficiaries.

  • Appoint an Executor of your Last Will

An Executor is the person who you chose to administer your estate. They are responsible for collecting the assets of the estate, paying any debts of the estate, paying state and federal taxes and then distributing the assets of the estate in accordance with the direction of the Will. When selecting your Executor ensure you select someone you trust and will be able to handle your financial matter prudently.

  • Appoint an Alternative Executor

The Alternative Executor will assume all responsibility for administering your estate if the Executor that you had selected is unwilling or unable to act or continue to act.

  • All your children must be listed

In your will you must list every child, even if you wish to state that the child will receive no part of your estate. In most jurisdictions, if you don’t name all of your heirs, they or their legal guardian(s) will have the right to contest your will.

 

  • Witnesses

All states (besides Vermont, which requires three) require two witnesses to sign a last will. Keep in mind that some states such as California, witnesses are not allowed gifts from the will as it creates a presumption that the gift was given under duress.

4. A Living Will

A living will, despite its name, isn’t at all like the wills that people use to leave property at their death. A living will, also called a directive to physicians or advance directive, is a document that lets people state their wishes for end-of-life medical care, in case they become unable to communicate their decisions. It has no power after death.

If you’re helping someone with their estate planning (or doing your own), don’t overlook a living will. It can give invaluable guidance to family members and healthcare professionals if a person can’t express his or her wishes. Without a document expressing those wishes, family members and doctors are left to guess what a seriously ill person would prefer in terms of treatment. They may end up in painful disputes, which occasionally make it all the way to a courtroom.

5. Payable on death

What is ‘Payable On Death – POD’

An arrangement between a bank or credit union and a client that designates beneficiaries to receive all the client’s assets. The immediate transfer of assets is triggered by the death of the client.

BREAKING DOWN ‘Payable On Death – POD’

POD accounts are created by filling out the proper forms at your bank or credit union. It is a cost-free service that allows for the transfer of all checking and savings accounts, security deposits, savings bonds and other deposit certificates. A POD account is very similar to a transfer-on-death arrangement, but deals with a person’s bank assets instead of their stocks, bonds, mutual funds or other assets. Both POD and TOD agreements offer quick means of asset dispersement, as both avoid the probate process, which can take several months.

6. Right of disposition (Who has a right to do it)

What happens after you die?  Theological doctrines aside, many people are unaware of Texas law concerning who is responsible for a decedent’s remains after he or she dies.  Most people are aware that after a loved one dies, his or her estate needs to be administered, usually by means of probate in a Texas court.  However, before probate occurs, dealing with the funeral and more immediate concerns need to be addressed.

Under Section 711.002 of the Texas Health and Safety Code, the following persons (in the order indicated) have the right to control the disposition of a decedent:

  • The person designated in a written instrument signed by the decedent;
  • The decedent’s surviving spouse;
  • Any one of the decedent’s surviving adult children;
  • Either of the decedent’s surviving parents;
  • Any one of the decedent’s surviving siblings;
  • Any adult person in the next degree of kinship in the order named by law to inherit the estate of the decedent

The most common scenario for a married couple in Texas is that the surviving spouse will be responsible for ensuring that the deceased spouse’s body is cremated or buried, depending on the decedent’s wishes?  But what if the decedent and his spouse never addressed the issue?  Or worse yet, what if this was a second marriage for the decedent and he or she wanted to be buried next to his or her first spouse, and the surviving spouse is unaware of these intentions or does not wish to follow them?

To address the concerns people may have about the disposition of remains, the Texas statute provides that a person may designate in writing who will be responsible for disposing of his or her remains, and that written instrument will control over the other people listed above.  The instructions may also state how you want your remains disposed of (e.g., burial or cremation).  This document concerning disposition of remains can be useful in a number of circumstances.  As an estate planning attorney in Houston, Texas, I have had more than one instance where relatives disagreed as to whether a deceased parent should be buried or cremated.  Each child claimed to know what the deceased parent wishes were, but there was no documentation of those desires.  Understandably, the funeral home is reluctant to take any action until it ca be assured that it will have no liability for whatever actions it takes.  In one case, this resulted in a deceased mother’s remains being located in a funeral home’s facility for over two weeks before the family could agree on what to do.  A written directive in this case would have avoided this situation altogether.

While the statue prescribes a written form for designating who will be responsible for a decedent’s remains, there are other ways to assure that your body will be dealt with according to your wishes after you die, and those wishes may be followed immediately and without regard to whether a probate proceeding is ever filed.  For example, in Texas you can leave written instructions in your will, or you may have a pre-paid funeral contract that controls the disposition of your remains.

7. Letter of Last Instructions

A letter of last instructions is an informal document that can help with the funeral planning process. Because it doesn’t go through legal channels, it can be written at home and in any manner you choose—and then be used as a guide for funeral and financial decisions made once you are gone. Ideal for those who don’t want to go through the hoops of estate planning, but who want to ensure that their loved ones have all the support they need, a letter of last instructions can be a helpful alternative to more formal funeral pre-planning.

Preparing a Letter of Last Instructions

There are key items a letter of last instructions should include to help loved ones navigate the legal and financial issues that follow death. From writing obituaries to filing insurance claims, they will have their hands full—and your information can really help.

The letter should include:

  • Personal information  that will make paperwork easier (your full name, address, Social Security number, date and place of birth, father’s name and mother’s maiden name)
  • Location of a will (if there is one)
  • Names of and contact information for friends and family members to be notified of death
  • Location of all personal documents, including but not limited to birth certificate, Social Security card, marriage papers, citizenship papers, military discharge papers
  • Information regarding any formal burial plans already made
  • Membership information for organizations, pensions, and other clubs that might help cover funeral costs
  • Financial information about all bank and savings accounts (including the location of safe deposit boxes and other hidden accounts)
  • List of all insurance policies (and their beneficiaries) as well as information on accessing each one
  • Names and contact information for relevant professionals (lawyer, executor of the estate, insurance agents, accountants, investment brokers)

Perhaps most importantly, this is also the place where you can clearly outline your burial wishes. For example, you can share your interment preferences, ask for certain items to be included in the memorial service, or put the contact information for your preferred clergy or religious ceremony.

You can also use this time to explain any tough decisions you were forced to make regarding the will, dispensation of inheritance, or insurance beneficiaries. Your family will feel better having tangible reasons and getting a look at your motivations.

Place copies of this letter in an accessible place known to many and be sure to share its existence with more than one family member or trusted advisor. Hiding a letter of last instructions (or placing in a safe deposit box that might not be opened until after the funeral takes place) voids its efficacy as a funeral planning tool.