Understanding what happens to funds when a beneficiary passes away is a crucial aspect of estate planning, and often overlooked by those creating or inheriting from trusts and estates; it’s a question many clients of Steve Bliss, an Estate Planning Attorney in Temecula, frequently ask. The answer isn’t always straightforward and depends heavily on how the funds were originally structured – whether through a trust, a will, or other estate planning tools. Proper planning avoids unintended consequences and ensures your wishes are fulfilled, even after your beneficiary is gone.
What if the beneficiary named a contingent beneficiary?
When a beneficiary dies *before* the grantor (the person who created the trust or will), the disposition of the funds depends on whether the estate plan anticipated this event. A well-drafted trust or will will *always* name contingent beneficiaries—secondary recipients to receive the funds if the primary beneficiary predeceases the grantor. This is the simplest and most common scenario. The funds pass directly to the contingent beneficiary, avoiding probate and potential complications. It’s a seamless transfer, and the grantor’s original intent is upheld. Approximately 60% of estate plans fail to adequately address this scenario, leading to unintended distribution of assets.
What happens if there’s no contingent beneficiary?
If the estate plan doesn’t name a contingent beneficiary, things become more complex. The funds will likely fall into the deceased beneficiary’s estate. This means the funds will be subject to probate, potentially incurring significant costs and delays. Probate fees in California, for example, are based on the gross value of the estate, and can quickly add up. For example, an estate valued at $500,000 could incur probate fees of $23,000, based on a statutory rate of 4% of the value above $168,000. This defeats the purpose of using a trust to *avoid* probate in the first place! Furthermore, the funds then become subject to the beneficiary’s creditors and could be distributed according to their will or, if they died without a will (intestate), according to California’s intestate succession laws.
The Story of Amelia and the Unexpected Inheritance
I remember Amelia, a lovely woman who inherited a significant sum within a trust established by her parents. Sadly, Amelia passed away unexpectedly, having never updated her own estate plan. Because her trust didn’t name contingent beneficiaries, the funds reverted to her estate, and her estranged brother, whom she hadn’t spoken to in years, ended up inheriting the money. This caused immense distress for her children, who felt the funds should have gone to support their education, as their mother always intended. This heartbreaking situation highlights the importance of regularly reviewing and updating estate plans to reflect life changes and ensure your wishes are honored.
How David Saved His Family From a Similar Fate
David, a proactive client of Steve Bliss, came to us after the passing of his wife’s father. His father-in-law had established a trust naming his daughter (David’s wife) as the primary beneficiary, but also thoughtfully included David and their children as contingent beneficiaries. When David’s wife unexpectedly passed away, the funds seamlessly transferred to David and their children, providing a financial safety net for their future. This illustrates how simple, proactive planning can protect your loved ones and ensure your legacy is preserved.
What about assets held jointly with right of survivorship?
If the funds are held in a joint account with right of survivorship, the funds will pass directly to the surviving joint owner, regardless of what is stated in the beneficiary’s will or trust. This can create unintended consequences if the beneficiary intended the funds to be used for a specific purpose, such as supporting their children. California is a community property state, meaning all assets acquired during a marriage are owned equally by both spouses. The surviving spouse automatically inherits all community property, even without a will. However, separate property – assets owned before the marriage or received as a gift or inheritance during the marriage – is subject to distribution according to the deceased’s will or intestate succession laws. A significant tax benefit of community property is the “double step-up” in basis for the surviving spouse, meaning the basis of the assets is stepped up to fair market value at the time of death, reducing potential capital gains taxes when the assets are sold.
43920 Margarita Rd ste f, Temecula, CA 92592The Law Firm of Steven F. Bliss ESQ. offers a comprehensive review of your existing estate plan to identify potential gaps and ensure your wishes are protected. With over a decade of experience, Steven F. Bliss ESQ. and his team can provide the guidance and expertise you need to navigate the complexities of estate planning. Call us today at (951) 223-7000 to schedule a consultation.
Don’t let the unexpected derail your legacy. Protect your loved ones and ensure your wishes are fulfilled by taking proactive steps today. Contact The Law Firm of Steven F. Bliss ESQ. – because planning for tomorrow starts today.