If you have just completed your estate planning documents, you may feel like breathing a sigh of relief that everything is finished. Well, not so fast! Without updating your beneficiary designations to coincide with your estate planning documents, your estate plan may not work the way you intended, possibly jeopardizing your heirs’ inheritances and resulting in tax consequences. Your attorney should explain exactly what must be done, but here is an overview of what you need to know.
What Assets Have Beneficiary Designations?
Certain types of assets allow you to designate a beneficiary to receive the proceeds of the account or policy. These include life insurance policies, brokerage and investment accounts, retirement accounts (401(k)s, IRAs, etc.), annuities, pensions, and similar accounts.
How Do Beneficiary Designations Impact Your Estate Plan?
The information provided on your beneficiary designation form dictates what happens to the asset and where it goes upon your passing. Importantly, if the beneficiary designation contradicts your estate planning provisions, the beneficiary designation controls. This means you could lose benefits that you incorporated into your estate planning documents if you don’t make the necessary changes to your beneficiary designations. For example:
- Your estate plan included tax planning to either defer or eliminate estate taxes. If you do not update and tie your beneficiary designations to that planning, you may incur taxes that you otherwise could have avoided.
- You created trusts for your children within your estate planning documents. If your beneficiary designation just says the child’s name or “descendants, per stirpes,” the asset will pay outright to the beneficiary instead of funneling appropriately into the trust you set up for the beneficiary’s benefit. This could lead to a large sum of money going directly into the hands of a young beneficiary (or court-appointed guardian of a minor beneficiary) – which is likely what you were trying to avoid when you put your estate plan into place.
- You disinherited someone in your estate planning documents or left assets unequally between beneficiaries. If your beneficiary designations are not updated, a beneficiary who you did not want to receive money may get it, and/or a beneficiary you wanted to give more money to may not receive it.
A missing or invalid beneficiary designation does not automatically mean that the asset is paid to your estate. Depending on the asset, there may be policy provisions or account plan rules that will dictate the beneficiary based on who survives you.
How Do You Avoid Problems with Beneficiary Designations?
As discussed, you must update your beneficiary designations as needed to coordinate with your estate plan. In addition, you should name both primary and contingent beneficiaries. A contingent beneficiary is essential in case your primary beneficiary predeceases you and you do not get the opportunity to update the beneficiary designation. This ensures that the asset goes to the people you want.
It also helps avoid the need to probate those assets. If there are no available beneficiaries named, the asset may, but will not necessarily be distributed to your estate. If it does go to your estate, your executor will likely have to go through the probate process to distribute the asset. The probate process involves petitioning the court to distribute the asset, which delays the ultimate distribution and can be costly.
You don’t want to spend time and money on an estate plan only to have it go wrong because of something as simple as not updating your beneficiary designations. Consult with an attorney if you are not sure what actions to take.
If you need to create or update your estate plan, our attorneys have extensive experience drafting estate plans to help clients leave a lasting legacy for their families. Contact us to discuss your estate planning needs.