The Importance of Designating Beneficiaries

One of the most often overlooked aspects of an estate plan, especially with younger clients, tends to be the significance of beneficiary designations. When clients come in for an initial appointment, they often assume that by signing a Last Will & Testament, any asset they own will be controlled by the Last Will & Testament; however, as will be detailed below, that is not the case.

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Your Last Will & Testament only controls assets that do NOT have designated beneficiaries, which are referred to as “probate” assets. Assets that have designated beneficiaries “attached” to them at the death of the owner are considered “non-probate” assets and do not follow the owner’s Last Will & Testament (i.e. the beneficiary designation given to the company administering the asset controls over the Last Will & Testament).

For example, if you filled out paperwork to name your parent as the primary beneficiary of a life insurance policy when you took out the policy, your parent will receive the money from that policy at your death, regardless of what your Last Will & Testament may state or regardless if you are married or have children. If you never completed the beneficiary form for your life insurance policy, it is likely that the policy will become a “probate asset” payable to your probate estate, which means that it will follow the terms of your Last Will & Testament (or, if you have no Last Will & Testament, then the laws of intestate succession apply, which is the state’s automatic estate plan for you based on your family situation).

Other examples of “non-probate” assets include the following:

  •  bank accounts jointly held or made “payable on death” (POD);

  • motor vehicle titles that are titled “with rights of survivorship” or “transfer on death” (TOD);  

  • stocks, bonds, life insurance, 401k’s, IRA’s, or other investment accounts where beneficiaries have been designated; and

  • real estate held joint with rights of survivorship, designated as “transfer on death” (TOD), or where a remainder estate (owned after your death) has already been specified in a deed.

The owner of the account or policy typically must complete a specific form for each financial institution or life insurance company to designate beneficiaries. This is often done via a paper form or sometimes online through the company’s specific client portal. Each company has different forms, policies, and procedures for beneficiary designations, and some have “default” beneficiaries if you fail to name anyone. There are special rules that apply to certain benefits that are sponsored through your employer, such as 401K and pension related benefits. Under Federal law (ERISA), a married person may not list a non-spouse as a beneficiary of such employer sponsored benefits without the spouse’s written consent.

Before naming a beneficiary, especially for clients with minor or handicap children, it is important to consult an attorney as part of a review of your overall estate plan. For example, if your estate plan restricts when and where a child would receive assets through the use of a trust or UTMA custodianship (i.e. the child does not receive assets until a designated age), it is critical that you do NOT just name your child as the beneficiary; instead, the beneficiary designation needs to be tailored to your specific estate plan to account for the trust or custodianship.

A very common beneficiary designation issue is when a person names one person as the beneficiary to an asset believing that this one person will just “share” the asset with everyone else. This comes with a lot of risks. First, this person is not obligated to do so. Second, this person may not be able to do so due to their own death or credit issues. Third, depending upon the type and value of the asset, there may be income tax and gift tax issues associated with this, turning something that was meant to be “simple” into a much more complicated matter.

Oftentimes, clients fail to take the time to complete or update these forms with the company that is administering the asset.  Other times, clients complete the forms, but fail to make sure that they are properly received and processed by the financial institution. We recommend that copies of all beneficiary forms and confirmations of the changes be kept with your estate planning documents and that clients periodically review their beneficiary designations.

While filing out a form sounds simple, the failure to make sure that this is properly done can make a huge impact for your intended beneficiaries. If you need assistance with planning your estate, contact the Law Office of Amber L. Niese, LLC.

Amber Wagner