Beneficiary Designations: The Estate Planning Step People Often Forget
When people think about estate planning, they often think first about a will or a trust. Those documents are important, but they are not the only pieces of the estate planning puzzle. Beneficiary designations are another critical area that should not be overlooked.
A beneficiary designation tells a financial institution, insurance company, retirement plan, or similar account administrator who should receive an asset after the account owner passes away. In many cases, these designations control the transfer of the asset regardless of what a will says.
Why Beneficiary Designations Matter
Certain assets commonly pass by beneficiary designation rather than through a will. These may include:
- Life insurance policies;
- Retirement accounts, such as IRAs and 401(k) plans;
- Annuities;
- Certain brokerage or investment accounts;
- Payable-on-death bank accounts; and
- Transfer-on-death accounts, where permitted.
Because these assets may transfer directly to the named beneficiary, it is important for the designations to be accurate and up to date.
Common Problems
Beneficiary designations are easy to overlook. A person may name a beneficiary when an account is opened and then forget to update it for many years. Over time, circumstances may change.
Common issues include:
- An ex-spouse still listed as beneficiary when that is no longer intended;
- A deceased person still listed as beneficiary;
- No contingent beneficiary named;
- Minor children named without proper planning;
- Beneficiaries listed inconsistently with the overall estate plan;
- Outdated names or contact information;
- Accounts with no beneficiary designation on file; and
- Beneficiary forms that were never completed or accepted by the institution.
These issues can create confusion, delays, disputes, or unintended results.
When to Review Beneficiaries
Beneficiary designations should be reviewed periodically and whenever a major life event occurs. Examples include marriage, divorce, the birth or adoption of a child, the death of a spouse or beneficiary, a significant change in assets, retirement, or the creation or update of a will or trust.
It is also wise to review beneficiary designations after changing jobs, rolling over retirement accounts, purchasing life insurance, or opening new investment accounts.
Coordinate With Your Estate Plan
Beneficiary designations should be reviewed together with your broader estate plan. A will or trust may express your overall wishes, but beneficiary designations may control how certain assets actually transfer.
For example, if a retirement account names one person as beneficiary, that account may pass to that person even if the will says assets should be divided differently. This is why coordination is so important.
In some cases, naming a trust as beneficiary may be appropriate. In other cases, naming individuals directly may make more sense. The right answer depends on the type of asset, tax considerations, family circumstances, and the overall estate plan.
Final Thoughts
Reviewing beneficiary designations is a simple step that can have a significant impact. It helps ensure that retirement accounts, life insurance policies, annuities, and other accounts transfer according to your current wishes.
If you have not reviewed your beneficiary designations recently, consider doing so as part of your next estate planning or financial review. DBMCPA also recommends discussing your designations with your estate planning attorney, financial advisor, and tax advisor to confirm they align with your overall plan.
