Surprising Facts About Beneficiary Designations

Did you know that even the most carefully crafted estate plan can be overridden by something as simple as a beneficiary designation? It’s a common oversight that many families make, assuming that their will or trust will dictate how their assets are distributed. But in reality, those listed beneficiaries on accounts and policies hold significant power. Let’s delve into this topic further to understand why it’s crucial to review and update your beneficiary designations regularly.

Your Beneficiary Designations Trump Your Estate Plan

Imagine this scenario: You diligently set up a trust to ensure your special needs child’s financial security after you’re gone. However, you forget to update the beneficiary designation on your life insurance policy, which still lists only your older children. In the event of your passing, that life insurance payout goes directly to your older children, bypassing your carefully laid-out trust.

Life Events Can Invalidate Your Intentions

Life is unpredictable, and major life events like marriage, divorce, births, and deaths can significantly impact your estate planning needs. Failing to update your beneficiary designations after such events can lead to unintended consequences. For instance, if you were single when you set up your retirement account and you listed your sister as the beneficiary, and then you get married and forget to replace your sibling with your current spouse, then your wife may not receive anything after your death.

Be Aware of the Difference Between A Primary Beneficiary and a Contingent Beneficiary

Each type of account my have a different methos of naming beneficiaries. A primary beneficiary is the first person who is given your assets after the owner of the account passes. Often you can list multiple people to share equally (or sometimes in specific percentages) as primary beneficiaries. Contingent beneficiaries are only used when all of the primary beneficiaries are no longer living. It is important to know if your account will be distributed to the descendants of your primary beneficiaries before your contingent beneficiaries.

Non-Probate Assets

Assets like bank accounts, retirement accounts, life insurance policies, and investment accounts often pass directly to designated beneficiaries outside of probate proceedings. This means they bypass the public probate process, ensuring quicker access to funds for your loved ones. If these assets are not in your trust, they will be distributed to the designated beneficiaries upon your death and will bypass any wishes you have in your estate plan.

Review and Update Regularly

Given the potential consequences of outdated beneficiary designations, it’s essential to review and update them regularly. Set a recurring reminder to revisit your designations after major life events or at least annually. This simple practice can prevent unintended beneficiaries from inheriting your assets and ensure your loved ones are adequately provided for. Updating your beneficiary designations doesn’t have to be complicated, but it does require attention to detail and timely action. Here’s a step-by-step guide to ensure your beneficiary designations accurately reflect your current wishes:
  1. Identify All Relevant Accounts and Policies: Compile a comprehensive list of all your financial accounts, insurance policies, retirement plans, and any other assets with designated beneficiaries. This may include bank accounts, investment accounts, life insurance policies, retirement accounts (such as 401(k)s or IRAs), annuities, and even certain types of real estate or vehicles.
  2. Gather Necessary Information: For each account or policy, gather the necessary information to update the beneficiary designation. This typically includes account numbers, policy details, and contact information for the financial institution or insurance company managing the asset.
  3. Review Existing Designations: Carefully review the current beneficiary designations on each account or policy. Pay close attention to any outdated or incorrect information, such as former spouses or deceased individuals.
  4. Consider Your Intentions: Reflect on your current financial situation and family dynamics to determine who you want to designate as beneficiaries. Consider factors such as changes in marital status, births or adoptions, deaths in the family, and any special circumstances, such as providing for a special needs child.
  5. Update Beneficiary Designations: Contact each financial institution or insurance company to request the necessary forms or instructions for updating beneficiary designations. This may involve completing a beneficiary designation form, submitting a written request, or accessing online account management tools.
  6. Provide Required Information: Fill out the beneficiary designation form or provide the requested information accurately and completely. Include the full legal names, dates of birth, and Social Security numbers of the designated beneficiaries to ensure clarity and avoid potential issues during the claims process.
  7. Review and Confirm: Before submitting the updated beneficiary designations, carefully review the information for accuracy. Double-check names, dates, and other details to ensure everything is correct. If possible, consider consulting with a legal or financial advisor to ensure your wishes align with your overall estate plan.
  8. Submit Documentation: Follow the instructions provided by each financial institution or insurance company to submit the updated beneficiary designations. This may involve mailing forms, uploading documents online, or visiting a local branch office in person.
  9. Keep Records: Maintain copies of all documentation related to the updated beneficiary designations for your records. This includes confirmation emails or letters from the financial institutions or insurance companies acknowledging the changes.
  10. Monitor and Review Regularly: After updating your beneficiary designations, make it a habit to periodically review them to ensure they remain accurate and up to date. Consider scheduling an annual review or conducting a thorough review after significant life events.
Quick Tip: If you add an owner to your account while you are living, you may also need to list them as a beneficiary if you want them to receive the assets in the account after you pass. As an example, we have elderly clients who add an adult child as an owner to their checking and savings accounts so that they can help them pay bills and stay on top of their finances. Recently we have noticed that after the primary owner passes away the bank may transfer the remaining assets to the listed beneficiaries, bypassing the extra “owner” of the account, if the extra owner can’t prove that they contributed assets to the account themselves. Because of this, if you want the additional owner to receive the assets in the account after you pass away, it is recommended that you take the extra step of listing them as the first beneficiary. Equally important to know, the bank may choose to give this extra owner full ownership of the account after your passing. If so, don’t add anyone as an owner that you don’t want to receive the assets in your account after you pass.
By following these steps and staying proactive about updating your beneficiary designations, you can ensure that your assets are distributed according to your current wishes and provide for your loved ones’ future financial security. Remember, taking the time to address this important aspect of estate planning can offer invaluable peace of mind for you and your family. If you decide to create an Estate Plan with Alan R. Harrison Law, we will help you identify the accounts you have and help you decide who you should name as your beneficiaries. Remember, your estate plan is only as effective as its most overlooked detail – your beneficiary designations. Take proactive steps to review and update your designations regularly, considering any life changes that may impact your intentions. By doing so, you can ensure that your assets are distributed according to your wishes, providing for your family’s needs long after you’re gone. We like to provide links to resources when we find them, and here is a good resource created by AARP to help you get started with your estate plan and help you identify your beneficiaries.