I am Named as Beneficiary
If someone passed away naming you as a Beneficiary of their estate, there are a few things about the administrative process that you should know. First, the process will vary depending on whether the decedent used a Will or a Trust.
A Will is, essentially, a document that nominates a “Personal Representative” to manage the estate and directs the probate court regarding the distribution of assets. If you were named as a Beneficiary in a Will, you are considered an “interested person” and are entitled to a copy of the Will for your review. You also have the right to contest the Will or the appointment of the “Personal Representative.” It is important to recognize that the Probate process takes time. The Personal Representative is responsible for the decedent’s taxes, valuing all the of the property, dealing with creditor claims, and numerous other duties, which are fulfilled during the court’s timeline. Therefore, it is not uncommon for a Beneficiary to wait a year or more before receiving an inheritance.
A Trust fulfills a similar duty of naming a manager (the “Trustee”) and directing the distribution of assets upon the decedent’s death. However, a Trust generally does not require court involvement, so the timeline for completing an administration is normally quicker, although the Trustee still has duties to deal with taxes, creditors, valuations, etc. If you are the Beneficiary of a Trust, you are entitled to a copy of the portions of the Trust agreement that relate to your interest in the Trust, contact information for the Trustee and, in many instances, an accounting of the Trust assets.
Second, as a Beneficiary of a Will or Trust you should understand that the Estate Planning document only controls certain property and there are instances wherein the terms of a Will or Trust go unfulfilled because of how a decedent owned the property at death. For instance, a Will may say that the decedent’s children only receive property when they become 25 years old because the parent was concerned that the children couldn’t properly handle the inheritance at a younger age. However, the decedent may never have taken the step of changing the Beneficiary Designation on the life insurance policy to go into their probate estate. Upon death, the policy pays out to the listed Beneficiaries (in this case: young children) and does not go by the terms of the Will. Such a problem was not created by poor administration from the personal representative, it was created by the lack of coordination in the assets when the decedent was still alive. This example highlights the occasional disconnect between the estate documents, the expectations of the Beneficiary, and the results; and should serve as a word of caution in how you create and coordinate your own plan. It is possible that not every asset passes according to the terms of the decedent’s Estate Plan.
Finally, although estate taxes are paid by a decedent’s estate (and apply to less than 1% of the population) certain assets may still have income taxes due upon receipt or withdrawal by the Beneficiary. Most notably, qualified retirement accounts, IRAs, and annuities often have income tax that must be paid by the Beneficiary as they withdraw the funds. There are withdrawal rules, timeframes, and planning strategies that Beneficiaries need to become familiar with to ensure that they don’t incur needless penalties or pay exorbitant tax.