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a woman looking concerned about the challenges she is facing after naming a caregiver and non-relatives as beneficiaies

Expect challenges when a caregiver and other non-relatives are named as beneficiaries

by Legacy Plan | October 2, 2019

Naming a non-relative, like a caregiver, as a beneficiary to your estate is not without risk, especially if you are survived by a spouse, children and other blood relatives. One of the biggest risks is that a relative could attempt to challenge the validity of your will, trust or other estate documents that include a transfer of assets to a non-relative. Another issue is the potential tax implications on your estate if you decide to transfer certain assets to a non-relative. This is why it is so important to engage in proper estate planning with an experienced estate planning attorney.

Naming close friends and other non-relatives, such as your caregiver, as a beneficiary in your estate can be a risky proposition, especially if you are survived by a spouse and/or blood relatives like children, siblings, etc. One of the biggest risks is that a blood relative could view the addition of a non-relative as a beneficiary of your estate as either improper or based upon fraud or undue influence. This could lead to a scenario where a blood relative, or relatives, dispute the validity of your estate and the designation of a non-relative as a beneficiary. This could result in costly and time-consuming litigation.

Is developing a bond with a caregiver common?

This is a fairly common legal issue in trust and estate planning since many elderly individuals develop, over time, close personal relationships with their caregivers. Some caregivers may even become like part of the family since you interact with them on a daily basis and they are literally there to assist you when you need help.

a concerned man sitting in front of an arguing couple

If you have become close with a caregiver and are considering adding them as a beneficiary in your will, trust or other estate planning documents, you need to take appropriate steps to ensure the beneficiary designation is done properly and your estate is protected from potential legal challenges that could be pursued by other individuals.

Is there a financial risk when naming a non-relative as a beneficiary to a retirement account?

If you are interested in naming a non-relative, especially someone other than your spouse, as the beneficiary of a retirement account, think twice. Or, at the very least, approach this option with extreme caution. Why? Because naming a non-relative as the primary beneficiary over your spouse has major financial implications for the retirement account and your overall estate. For example, only spouses are legally able to roll retirement plan assets into their own retirement accounts. Conversely, if a non-relative, like a caregiver, is named the beneficiary of your 401(k) plan or Roth IRA, they will generally be required to begin taking required minimum distributions soon after you pass on. The required minimum distributions will be based on their age. Furthermore, if you name someone other than a spouse as the beneficiary of your retirement account, the assets in that account will be included in the overall value of your estate for the purposes of calculating any potential federal estate taxes.

Risks associated with naming a non-relative over a relative as a beneficiary in your estate
Potential dispute resulting in litigation Potential negative tax implications Potential drain on your estate assets
Naming a non-relative as a beneficiary in your will Check mark Check mark
Naming a non-relative as a beneficiary to your retirement account Check mark Check mark Check mark
Naming a non-relative as a beneficiary to your life insurance policy Check mark
Naming a non-relative as a beneficiary in a trust Check mark Check mark

Are trusts useful when transferring assets to non-relatives?

an attorney giving advice to two people about transferring assets to non-relatives

If you want to transfer assets to a non-relative, consider establishing a revocable living trust. This type of trust provides the means for you to maintain control over your assets, even after your death, and the designation of beneficiaries is more flexible. When you properly establish a trust, you can communicate how you want the trust assets to be managed, the circumstances under which they can be distributed and when the trust assets should be withheld. For example, if you want to leave assets to the children of your lifelong best friend, you can include stipulations about the age at which the children can gain access to the trust assets.

A trust can also be a great tool for transferring assets to non-relative adults (e.g., a caregiver, a close friend, a charitable organization, etc.) while potentially reducing your estate tax burden and allowing you to maintain a level of control over the assets, even after you have passed on. There are also an array of different trusts that can be created to suit your particular needs. Here is a brief overview of just some of the trusts that can created:

  • Revocable trust
  • Irrevocable trust
  • Charitable trust
  • Special needs trust
  • Constructive trust
  • Spendthrift trust
  • Tax bypass trust
  • Totten trust

Consider other strategies for transferring assets to non-relatives

Depending on your specific circumstances, it may be prudent to consider giving a non-relative, like a caregiver, certain assets during your lifetime to take advantage of any annual gift tax exclusion and your lifetime gift tax exclusion. For example, you could create a 529 plan intended to help cover the educational expenses for the non-relative. With a 529 account, you generally maintain control of the account until the funds are withdrawn. As a result, part of your estate plan may be to update the successor designation to stipulate who will take over management of the 529 account when you pass on.

How can I avoid non-relative beneficiary pitfalls?

As you can see, there are multiple options available for you to leave a non-relative your hard-earned assets. But you need to make sure it is done properly and with legal precision to reduce the risk of potential litigation. This is why it makes sense to schedule a meeting with Legacy Assurance Plan. Becoming a member means you will gain access to valuable resources and guidance to develop a comprehensive estate plan that honors your memory and wishes. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing effective legal, financial and tax strategies.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at legacyassuranceplan.com.

Phone - 844.445.3422
Email - info@legacyassuranceplan.com
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