Q Dear Rick:
I have an unusual situation that I hope you can help me with. A couple months ago my aunt was in a car accident and was critically injured. Since the accident my aunt has remained unconscious and her doctors have told us that she only has a few more months to live. She has a trust which I am the successor trustee. Since the accident I’ve taken over her finances. Her primary beneficiary is her older sister and that is where the problem comes in. Her older sister is on a variety of government programs and she would lose those benefits if she inherited the money. The problem is the inheritance is not that large and in a short period of time she would have to reapply for those benefits and at that point in time, who knows. My question to you is are there any ideas that you have. You should know that if the older sister does not get the money, it goes to her children.

Bruce

A Dear Bruce:
I am very sorry about your aunt’s accident and I wish her a very peaceful journey. In reviewing your situation I do have a solution that may work, but it depends upon your aunt’s older sister.

Under our laws a beneficiary can disclaim their interest. What that means is that a beneficiary is voluntarily giving up their rights to inherit something. When someone disclaims their interest, whether it is as a beneficiary of an insurance policy or as a beneficiary of a Trust, they’re considered to have predeceased the person who named them as beneficiary. As a result of the disclaimer the secondary beneficiaries would move up a notch and would become the primary beneficiary. In the situation at hand, if the older sister disclaims her interest, her children, who are the secondary beneficiaries, would then be the primary beneficiaries. If this is what happens, since the sister would not have received anything, there should be no impact on any of her subsidies and should not affect any government benefit she is receiving. However, as I mentioned earlier, it is dependent upon two things: the older sister’s legal competence and her approval.

In order for someone to disclaim their interest they must have the legal capacity to do so. Therefore, if the older sister is of a clear mind and understands her situation, then the presumption is that she is legally competent and thus, can make an informed decision to execute the disclaimer. If she is not legally competent then she does not have the legal capacity to execute the disclaimer. If that is the situation, you may have to have someone else execute the disclaimer for her.

In disclaiming one’s right of a beneficiary, it is important that the disclaimer is put in writing and properly executed. My recommendation is to have an attorney who is familiar with estates prepare the disclaimer. A competent and experienced attorney will make sure that the I’s are dotted and the T’s are crossed.

Disclaimers are not that unusual and they are used in many different types of situations. The case at hand is one scenario where disclaimers are effective but there are many different cases where disclaimers make sense. However, it is important to remember that when someone disclaims an interest, they don’t get to choose who the next beneficiary is. Whoever the secondary beneficiary is would be next in line. That is why it’s always important when you do any sort of estate planning, such as naming beneficiaries on a 401(k) or life insurance policy, to name a primary and secondary beneficiary. In addition, let us not forget that all our situations change over time and that is why every so often you need to review your beneficiary designations to make sure they reflect what you want.

Good luck!

Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com