Prevent an Estate Disaster

March 30, 2012

Prevent an Estate Disaster

It’s a situation no one wants to think about: A husband and wife, or parent and child, die in a common disaster. The emotional impact on a family is tremendous. Financial and legal complications can cause added hardship for loved ones left behind. Creating an estate strategy to address this devastating possibility can help prevent unintended asset distribution consequences, tax setbacks and potential legal challenges later on.

Unless you’ve made provisions in your will to address the possibility of you and your spouse or other primary beneficiary dying simultaneously, your property may not be distributed as you would like it to be and could be subject to unnecessary estate settlement expenses and delays.

One strategy
Make sure your attorney includes a “common disaster” clause in your will. Common disaster clauses are designed to address situations where the order of death can’t be readily determined. Their purpose is to prevent assets from passing into the estate of the other deceased individual, only to be immediately distributed from that person’s estate. These clauses may vary somewhat from state to state, based on local law.

Very generally, a common disaster clause provides that your spouse or other primary beneficiary will inherit your property only if he or she outlives you for a specified period (usually 30 to 90 days). Otherwise, your assets will pass based on the assumption your spouse or other primary beneficiary died before you. Your estate planning attorney can review your will with you and determine whether a common disaster clause could help achieve your goals for your estate.

Potential complications
A common disaster that claims the lives of both spouses at once also can create life insurance complications — for example, when one spouse is insured under a life insurance policy and the other is the beneficiary. If the policy’s primary beneficiary is considered to have outlived the insured, the beneficiary receives the insurance proceeds, and they become part of his or her estate.

When the order of death can’t be determined, most states with laws based on the Uniform Simultaneous Death Act dictate that the benefits be paid out as if the primary beneficiary died first. If the insured person hasn’t named a contingent beneficiary, the insurance proceeds will be paid to and included in the insured’s estate.

Naming both primary and secondary beneficiaries for any life insurance policies you own can help eliminate complications. So can having a common disaster clause in your policy. Many insurance companies will insert a common disaster provision upon request. Talk with your financial professional about options that will work well for you.