Who You Should Never Name as a Beneficiary in Your Estate Plan

who you should never name as beneficiary

Deciding who inherits your wealth matters deeply. You likely want to ensure assets benefit the loved ones you worked so hard for. But modern finances require thoughtful precision around distribution to avoid issues.

Simply listing someone as a beneficiary can actually complicate aligning assets with wishes when you’re gone. It may forfeit needed government assistance for a disabled heir, create burdensome taxes, or worse.

As estate planning lawyers, we’ve seen well-meaning clients make innocent yet impactful errors in naming beneficiaries without digging into supplemental planning. Just as crucial as knowing who to appoint is recognizing when NOT directly listing someone makes more sense.

Let’s discuss three common examples where naming a beneficiary in basic documents backfires.

Never Name Minor Children Outright

Naturally, you want to provide for your kids should the unexpected happen. But simply naming young beneficiaries on financial accounts or other estate documents creates an overlooked issue – minors can’t directly inherit assets or manage administrative duties until reaching the age of 18.

Per the North Carolina Probate Code, persons under age 18 lack legal capacity. This means that beneficiary minors cannot claim insurance proceeds, retirement funds, property titles, bank accounts, or most other inheritances until legal adulthood. Some financial custodians even refuse payout requests until the child turns 25.

In these situations, assets sit frozen without adult administration until the child reaches “legal capacity.” Even if it’s in an interest bearing account, that money would be much better invested in the market then sitting at .25% APY.

The Need for Guardianship

If minors inherit certain assets outright too early, the probate court must appoint guardians to oversee the children’s interests. The judge will choose someone to manage distributions from the inheritance until adulthood.

Naturally, this can get complicated. Surrogate guardians don’t always handle assets responsibly. Sometimes, this is deliberate. In many other cases, it’s simply a matter of expertise. Your relatives may not know how to care for your child and manage their inherited estate. Or they may spend assets inappropriately, such as on personal expenses and thus depleting the estate assets, such that the child never gets to see them.

Better Solutions Exist

Rather than either outright naming minors or involving courts assigning guardians, specialized estate planning tools enable you to customize inheritance instructions benefiting children now while delaying control. Common approaches include:

  • Trusts – Assets transfer to trustees who use distributions for needs until beneficiaries reach ages you select based on maturity.
  • UTMA Accounts – Custodial funds become available in increments per NC laws.
  • Entity Guardians – Responsible third parties oversee assets until adulthood.

These tools ensure that the courts aren’t left making major financial choices for your child. An estate planning lawyer can incorporate protections into inheritance planning specifically for minors.

Avoid Directly Naming Those Reliant on Public Assistance

If certain heirs rely upon needs-based public benefits, naming them as beneficiaries on assets could cause them to lose the support they need.

Government programs like Medicaid, SSI, and housing assistance impose strict income and asset limits. Surpassing these limits through direct inheritances leads to losing medical coverage, cash stipends, and other essential living subsidies disabled beneficiaries often require for daily stability.

There are ways around this. Special needs trusts allow disabled beneficiaries inheriting assets to still qualify for benefits through expert legal positioning.

Think Twice Before Naming Troubled Beneficiaries Outright

Heartbreaking though it is, beneficiaries struggling with addiction or even money mismanagement may require asset protection from themselves. Squandering an inheritance defeats your wishes to provide lasting security.

People who, for whatever reason, are not prepared to responsibly receive a large influx of cash may ultimately be harmed by an inheritance. These harmful outcomes could include:

  • Relapsing into heightened drug/alcohol abuse
  • Making absurdly expensive purchases on impulse
  • Ignoring common sense investment/wealth management
  • Accelerating dangerous cycles of financial victimization

It’s natural to want to help loved ones who are down on their luck. However, there are ways to do it that can help them experience the full benefit of your estate.

Protect Loved Ones From Themselves

Customized trust structures offer options for how your estate is distributed. Under these arrangements, objective third-party trustees manage assets on behalf of the person who isn’t ready to handle them yet.

Trustees can encourage positive behaviors and deter dangerous habits through spending oversight. Once the trustee determines that the beneficiary is on the right path, they can transfer control of the estate to them.

Specialized trust planning prevents the tragedy of beneficiaries reflecting years later on how quickly an inheritance evaporated through their own undisciplined actions. Reach out to discuss options for protecting loved ones from themselves while still providing lasting resources as they grow.

Schedule a Consultation – Ensure Your Legacy Thrives for Generations

When drafting the beneficiary designations in your estate plan, getting input from trust and estate attorneys helps ensure your legacy continues, providing for your loved ones far into the future. It can be tempting to try leaving wealth directly to specific heirs, but there are some beneficiaries you should never name outright without supplemental planning to avoid serious issues.

Our North Carolina estate planning lawyers at Apple Payne Law have spent years steering clients clear of innocent but impactful missteps in their estate planning. We can provide perspective on inheritance strategies suited to state laws while upholding unique family circumstances.

Contact our office in Kernersville to begin planning for your family’s future.

Author Bio

Ronald D. Payne II
Ronald D. Payne II is the CEO and Managing Attorney of Apple Payne Law, a North Carolina law firm he founded in 2018. With more than 11 years of experience practicing law, he is dedicated to representing clients in a wide range of legal matters, including business law, estate planning, family law, probate, and traffic law.

Ronald received his Juris Doctor from the Wake Forest University School of Law and is a member of the North Carolina Bar Association. He has received numerous accolades for his work, including being awarded the 2020 Client’s Choice Award by Avvo and multiple Rising Star awards from Super Lawyers.

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