Changing Beneficiary Designations Can Be Tricky

Filed under: Estate Planning

Designating beneficiaries is an important step in the estate planning process. Whomever you choose will inherit your assets, whether those are cash, real estate, life insurance payouts, retirement account holdings, or other forms of property. Most people assume that once they designate a beneficiary, they will never need to alter this decision. But of course, life has a way of intervening in our plans. Your beneficiary could pass away before you, become incapacitated and therefore unable to manage money, or something else could happen that causes you to change your mind.

Because things can change, it is usually a good idea to choose more than one beneficiary for your assets. However, for various reasons you might not wish to take this step. Or, you might choose several beneficiaries but still need to make a change later on.

In most cases, changing your beneficiary designations is as simple as filling out new beneficiary designation forms – not altering your will, because beneficiary designation forms actually take legal precedence over your last will and testament. But in some cases, you can run into a tangled web of legality when you decide to change your beneficiary designations. In particular, if you are incapacitated at the time, it can become difficult to alter your contracts.

That’s because in the state of California, the law requires that you have “contractual capacity” before you can sign or alter any contractual agreement. This rule extends to beneficiary designations.

Under the law, you do not have contractual capacity if you have a deficit in one or more of these abilities:

  • short term memory
  • long term memory
  • the ability to understand and communicate
  • the ability to understand and appreciate quantities
  • and more (this is by no means a complete list)

Since these abilities can be difficult to define and assess, it’s easy to see why changes to contracts (such as beneficiary designations) can quickly become a legal mess for elderly and disabled people. The change can even be challenged in court after your death!

There are three primary solutions to this problem: (1) You can have your Durable Power of Attorney make the changes for you, or (2) you can take preemptive measures to prevent a legal challenge by asking your doctor to state in writing that he or she believes you to have contractual capacity. (3) You can designate a family trust as the beneficiary of retirement account or life insurance policy, which will allow you to adjust you receives the assets in the trust document instead of the beneficiary designation. Keep in mind, it is also a good idea to sign your new beneficiary forms in front of witnesses who can attest to your ability to understand your actions.

For more estate planning advice, or to speak with our estate planning attorney, call our office to schedule an appointment.

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