Have You Checked Your Beneficiary Designations Lately?

When you think of estate planning, you might think of creating a will or a living trust to distribute your assets after your death. But beneficiary designations are also an important part of estate planning, and one that is often overlooked. If you haven’t reviewed or updated your beneficiary designations recently, it may be time to look them over and ensure that you know how they fit in with the rest of your estate plan.

What are Beneficiary Designations (and Why Do They Matter)?

Broadly speaking, beneficiary designations are legal instructions that specify who will receive certain assets upon your death. They are important because assets with beneficiary designations typically pass outside of probate, and assets that have beneficiary designations can be significant. Not paying attention to your beneficiary designations can lead to an unintended unequal distribution of your estate.

Here’s an example. Let’s say that you are widowed, with three adult children: Andrew, Billy, and Christa. You have a house worth $500,000, bank accounts with $50,000 in them, an investment account worth $350,000, and $100,000 worth of other personal property, including your car, jewelry, art, and furniture. That’s a total of $1,000,000 in your estate.

You have made a will that leaves your estate in equal shares to your three children. You are at peace, knowing your assets are planned for and you have treated your children fairly. But the outcome may be different than you imagined.

When you opened your investment account, you were likely asked to name a beneficiary for the account. Without much thought, you named your eldest child, Andrew, and promptly forgot about it. Upon your death, that $350,000 asset passes to your named beneficiary—not through your will. That means that Andrew will receive the $350,000 in the account, plus one-third of the assets that pass through your will. That is probably not what you intended.

Andrew might choose to share the assets in the investment account with Billy and Christa, but he’s under no legal obligation to do so. If he does share, there could be gift tax implications for him. If he doesn’t, there could be resentments and a rift between your children. Either way, a negative outcome could have been avoided with better planning.

Other Unintended Consequences of Failing to Update Beneficiary Designations

An unequal distribution of your estate is only one potential problem with failing to update your beneficiary designations. Others include:

• Assets going to the wrong person, such as proceeds of a life insurance policy going to a former spouse instead of your current spouse
• If your named beneficiary died before you and you do not have a contingent beneficiary named, the asset in question may have to pass through probate and could end up with someone other than the person you would have chosen
• If your will or trust leaves a particular asset to one person, but the beneficiary designation indicates the asset goes to someone else, there could be confusion, litigation, and needless conflict and legal expense
• If your retirement account or life insurance policy doesn’t have a contingent beneficiary named and defaults to your estate, there could be tax consequences, including potential estate tax liability
• If assets default to your estate, there could be potential exposure to creditors that could have been avoided if there had been a proper beneficiary designation
• If you have a family member with a disability who relies on government benefits, and an asset defaults to your estate because there is no beneficiary designation, your family member could inherit part of the asset directly, jeopardizing their eligibility for benefits.

As you can see, failing to update your beneficiary designations can lead to a host of unintended consequences. Are you aware of all the assets you own that might have beneficiary designations?

Updating Your Beneficiary Designations: a Checklist

Many people would struggle to name all of the assets they own that might have beneficiary designations. Here are some assets for which beneficiaries are commonly named:

• Retirement accounts such as 401(k)s, IRAs, and Roth IRAs
• Life insurance policies
• Bank accounts that are “payable on death” to a beneficiary
• Real estate with a “transfer on death” deed
• Investment accounts
• Brokerage accounts
• Annuities
• Health savings accounts (HSAs)

If you have a trust, you have also named beneficiaries for the assets that are held in the trust. It’s worth reviewing those designations, too, especially if one of your named beneficiaries is deceased or if you have had a falling out with a beneficiary and no longer wish for them to inherit from your estate.

How to Update Beneficiary Designations

In many cases, all you need to do is request a form to update your beneficiary designation from the entity that holds the asset, like your insurance company, bank, or investment firm. In some cases, there are limitations on who you can name as beneficiary. For instance, many retirement accounts, including 401(k)s and IRAs, require that your spouse, if you have one, be named as beneficiary.

If you have questions about how to update your beneficiary designations on an asset, or whether certain designations are permissible, your estate planning attorney can guide you as part of your overall estate planning strategy.

Work with an Experienced Estate Planning Attorney

To learn more about beneficiary designations and how and when to update them, contact The Law Offices of Dana M. Kyle, P.A. to schedule a consultation.