“As an estate planning attorney, I end up reviewing a lot of documents, hear about tactics, or just have someone suggest something in an estate plan that does not look ahead and plan for contingencies. Each month we will highlight one of these short-term planning items in our Legal Duct Tape segment. This month’s Legal Duct Tape is naming one person a beneficiary to carry out your wishes.”

Probably one of the easiest ways to plan for an estate disaster is to name a single child as a beneficiary on your life insurance, retirements accounts, bank accounts and other assets figuring that they’ll divide things up responsibly among the other children. It either doesn’t happen, or you place a huge tax burden on one child. Here’s why.

  • When you name a single person as a beneficiary, then they inherit everything. It’s there’s. It doesn’t belong to anyone else. And, no, it doesn’t make any difference if you told the Pope, 100 priests, and 1,000 nuns that what you wanted was for the child to divide things up fairly among the other children. It belongs to the one child.
  • The child is fully able to take the inheritance and do whatever they want with it. They have NO obligation to give it to anyone else.
  • Even if the child does decide to divide everything up equally with their siblings, they are now limited by the current gift tax limit in what they can give the child. If you leave $100,000 to one child and they are supposed to split it with three other children, that’s $25,000 to each other child. The child who inherited everything can only give $13,000 to each child before they have gift tax consequences. So they either have to suffer the tax or spread the distribution out over a few years.

If a retirement account goes to the child, in dividing up that account they would have to withdraw three quarters of it and incur all of the income taxes on it. If the retirement account were $400,000, they would have to withdraw $300,000 from the account to split it among the other three children, and now the child who inherited the account will have to pay income taxes on an additional $300,000 the next April 15.

There are right ways and wrong ways to handle estate planning, but not everyone can be an expert on everything. That’s why I’m here as The Estate Geek and why other experienced estate planning attorneys are out there… to help you so you don’t have to be an expert on estate planning. But one thing is certain—don’t just name a single child as a beneficiary and expect them to divide everything up. That’s like using duct tape to stop a leaking sewer pipe… the results just stink.