Importance Of Reviewing Your Beneficiary Designations

There are certain assets whose disposition is directed entirely by beneficiary designations. Common assets include IRAs, 401Ks, 403Bs, retirement accounts, annuities, life insurance, and certain brokerage accounts (all referred to here collectively as “plans”). When you sign up for one of these plans you are required to list the beneficiaries you wish to receive the proceeds of the plan when you pass. Most people complete the form without much thought and may even later forget the beneficiaries they designated. A comprehensive estate plan should always include the review of your beneficiary designation for each plan to ensure it’s consistent with the disposition you make under your Will or Living Trust Agreement, and your overall estate planning goals.

Review your Beneficiary Designations.

It may have been years since you filled out your beneficiary designations, and your personal circumstances may have changed since then. Major life events like marriage, divorce, the birth of a child, retirement, the death of a spouse may have taken place since you created your plan, and there’s a good chance that the designated beneficiaries may not be current.

Your Will or Living Trust Agreement does not control these plans.

Your Will or Living Trust Agreement cannot dictate the direction of any plan that is driven by a beneficiary designation. For instance, your Will or Trust Agreement may state that upon your passing, all your assets pass to your spouse, if living, but if your spouse is not living, your assets pass equally to your children. Although this may be your intent, the common misunderstanding is to believe that this provision in your Will or Trust automatically controls the direction of your plan (such as your IRA or life insurance policy), but this is not the case. These plans are directed by the beneficiary form for that plan. It’s important that your review your beneficiary designations to make sure it’s aligned with your Will or Trust Agreement. This one thing can derail any estate plan, no matter how well thought out it is.

Your Will or Living Trust Agreement also cannot dictate the direction of any beneficiary-designated plan, even if you reference the plan in your Will or Trust Agreement. For instance, your Will or Trust Agreement may state how you wish for your IRA be distributed upon your passing, but, a specific reference in your estate

planning documents would not control (or override) the beneficiary designation on file with the IRA custodian. An exception to this would be if you named your “estate” as the beneficiary under your plan. In such an instance, the plan would pass according to your Will or Trust Agreement, but it must first go through the probate process.

Caution when naming minors.

If a minor inherits the proceeds of a plan as an outright beneficiary, then a legal guardian will need to be appointed by the court to oversee the proceeds on the minor’s behalf until the minor reaches adulthood. In most instances, an official guardian would need to be appointed for the child even if a parent for the minor is living and caring for the minor. Guardianships can be a costly process that involves strict court supervision and regulation. Careful thought and discussion should be given as to the proper way to name minors as beneficiaries of your plan.

In summary, a comprehensive estate plan should always include the review of your beneficiary designation for each plan to ensure it’s consistent with the disposition under your Will or Living Trust Agreement.