Is your individual retirement account and/or pension plan beneficiary designation current? Many people are unaware that the provisions of their wills do not govern the distributions from their IRAs or pension plans. A recent New Jersey case, Newman v. Alboum, highlights this point. In that case a decedent had been living with another individual in a relationship that had existed for over 25 years. In 1993, the decedent executed a last will and testament which bequeathed everything to that individual. However, in 1959 the decedent had designated his mother and his sister as the beneficiaries under his pension plan, and in 1980, he designated his sister as the beneficiary of his insurance policy. The Court held that the beneficiary designation under the pension plan and insurance policy cannot be changed by the terms of the decedent's will and, therefore, the designations of the decedent's mother and sister as the beneficiaries would govern.
This case also highlights an important point that must be kept in mind when designing your estate plan. Often, an individual does not have sufficient assets that will pass under his or her will to take full advantage of the available unified credit equivalent (which is currently $625,000). However, the individual may have a sizable IRA or significant pension/retirement benefits that could be utilized to fund the credit shelter trust created under his or her will. Unless a beneficiary designation directs those assets or benefits to be paid over to the trustee of the credit shelter trust, they will not be available to fund the credit shelter and a portion of the unified credit may be wasted. This is true regardless of the language used in the decedent's last will and testament. A carefully drafted beneficiary designation would avoid this problem and would permit the use of these assets to fund the credit shelter trust. If properly crafted, that beneficiary designation can also avoid an immediate lump-sum distribution of the IRA/pension funds at death.
