Most people fill out beneficiary forms when they start a new job, open an investment account and open bank accounts. Then they forget about those forms—often for decades. Those people named as beneficiaries way back when, are now their heirs—whether they want them to be or not.
Wealth Advisor’s recent article, “Designated Survivor: Beneficiary Designations Can Make–or Break–Your Estate Plan,” reminds us that beneficiary designations override the terms of your will or trust. To avoid any unintended consequences, it’s very important to review your designations with your estate planning attorney. Think about the following:
Children. Many people name their children as beneficiaries on their accounts and other assets, without knowing the consequences of this choice. If a minor inherits an asset in this way, a guardianship proceeding will likely be required to appoint a guardian to receive and manage the inherited assets on behalf of any minor child. The court proceedings are costly and time-consuming. In many states, the court will place restrictions on how and when the money can be used for the beneficiary during the guardianship. When you designate a person with disabilities as a beneficiary, it may impact his or her ability to qualify for public benefits. These issues can be avoided by naming a trust as the beneficiary.
Major Life Changes. We all experience changes. They can include major changes like birth, death, marriage, divorce, a new home, or a job change. However, people frequently neglect to look at their estate plans and beneficiary designations, when these events occur. Coordinating your beneficiary designations with your estate plan, can eliminate the need to update your beneficiary designations with each life change. At the very least, it will give you with some guidance on the types of situations that should cause you to conduct a review and to update these forms.
Trusts. You may have, or want, a revocable trust in your estate plan. This will give you additional privacy, flexible administration and important protections for your beneficiaries. Beneficiary designations are an ideal way to transfer your assets into your trust and to leverage the benefits of trust planning, without impacting the ownership of assets during your lifetime.
Retirement Accounts. When it comes to selecting beneficiaries for income tax deferred assets, like IRAs or 401(k)s, it’s usually a spouse who is named as the primary beneficiary. This maximizes the income tax deferrals and other administrative privileges provided to surviving spouses. Deciding on the contingent beneficiary is a little harder, because there are income tax and other considerations that should be evaluated when making this decision.
The best way to preclude problems, is to review all of the accounts that have a beneficiary designation to ensure that they still reflect your wishes. Doing so will save your heirs a great deal of time and stress and eliminate any surprises. Talk with your estate planning attorney to ensure that all of your assets will transfer to the heirs you want, not the ones you forgot about years ago.
Reference: Wealth Advisor (August 6, 2018) “Designated Survivor: Beneficiary Designations Can Make–or Break–Your Estate Plan”