ADVERTISING: ADVERTORIAL: Don’t overlook beneficiary designations, a critical piece of your estate plan

You’ve drafted your will. Maybe you’ve even set up a trust. You feel good about your estate plan — and you should. But one piece of estate planning that trips up too many Idahoans: beneficiary designations. These small, often overlooked forms can have an enormous impact on what actually happens to your assets when you pass away. And the sobering truth is that beneficiary designations override your will or trust if not carefully coordinated to work with your other planning documents.

What Is a Beneficiary Designation?

A beneficiary designation is a document — usually a simple form — that tells a financial institution or insurance company who should receive a specific asset upon your death. These designations are attached to accounts and policies such as:

• Life insurance policies

• Retirement accounts (IRAs, 401(k)s, 403(b)s)

• Bank accounts with a “payable on death” (POD) designation

• Investment and brokerage accounts with a “transfer on death” (TOD) designation

Assets with beneficiary designations pass directly to the named individual — completely outside of your will and the probate process, and outside of your trust if you have one. None of that has to be a bad thing, but your beneficiary designations must be done correctly to avoid conflicting with your desired outcomes.

When Beneficiary Designations Go Wrong

Consider this scenario: An Idaho man remarries after a divorce but never updates the beneficiary on his 401(k). When he passes away, his ex-wife — not his current spouse — receives the retirement account. His will said it should be otherwise, but it didn’t matter. The beneficiary designation controlled.

This kind of situation happens more often than you’d think. Here are the most common mistakes:

Outdated designations. Life changes — marriages, divorces, births, and deaths — but beneficiary forms often don’t. A designation made decades ago may no longer reflect your wishes.

Naming a minor child directly. Minors cannot legally receive significant assets outright. If a minor is named as a beneficiary, a court may need to appoint a guardian of the property to manage those funds until the child reaches adulthood — a costly and time-consuming process. Or, a custodial account for a minor might be used, but the rules on such an account and when your child will get control of the funds will be established by state law, not your specific wishes.

Failing to name a contingent beneficiary. Your primary beneficiary may predecease you. Without a contingent (backup) beneficiary named, the asset may end up going through probate — exactly what beneficiary designations are designed to avoid.

Naming your estate as the beneficiary. This is rarely a good idea. It can trigger unnecessary probate, eliminate certain tax advantages for retirement accounts, and slow down the distribution of assets to your loved ones. Note that this is different from naming your living trust as the beneficiary which can sometimes be a very wise approach – but not always. There is nuance here that should be discussed with an experienced estate planning attorney.

The Beneficiary-Will Disconnect

Many people assume their will governs everything they own. It doesn’t. If your will says your spouse should receive your IRA, but your college roommate is still listed as the beneficiary on that account, your roommate gets the money. Courts have consistently upheld beneficiary designations over contradictory will provisions. The same is true of contradictions between beneficiary designations and the terms of a trust.

This disconnect is one of the most common — and costly — estate planning oversights I see in my practice.

What You Should Do

Take inventory. Make a list of every account and policy you own. Locate the current beneficiary designations on each. Don’t rely on your memory of what you think you set up. If you don’t have that documentation, contact the financial institution and request that they send you current proof of beneficiary designations so you can see definitively who you have listed. I cannot count how many times I’ve had a client tell me they were certain they had their kids listed as contingent beneficiaries (after their spouse) on something – only to let me know a few weeks later that they learned they had never listed any contingent beneficiaries.

Review and update regularly. At a minimum, revisit your designations after any major life event: marriage, divorce, the birth of a child or grandchild, or the death of a previously named beneficiary.

Coordinate with your estate plan. Your beneficiary designations should align with the overall goals of your will and any trusts you have in place. If your estate is designed to avoid probate proceedings, failure to take care of beneficiary designations may land your estate right back in probate court. In some cases, naming a trust as a beneficiary makes more sense than naming an individual — particularly for minor children or beneficiaries with special needs. These are all considerations to talk through with your attorney.

Don’t forget retirement accounts. IRAs and 401(k)s are often among the largest assets people own. The rules around who can inherit these accounts — and the tax implications — have become more complex in recent years. Getting this right matters.

Don’t assume that one beneficiary form covers everything. If you have an IRA, a money market account, and a brokerage account all managed through the same company, don’t assume that one beneficiary designation form will cover all 3 of those accounts. Ask your financial advisor or contact person if you need separate designation forms for each account at that financial institution.

The Bottom Line

A well-crafted estate plan is only as strong as its details. Beneficiary designations may seem like a minor administrative task, but they carry enormous legal weight. Taking the time to review and update them can save your family significant stress, expense, and conflict down the road.

My law firm is currently offering free telephonic, electronic, or in-person consultations concerning probating estates or creating estate planning documents.

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Robert J. Green is an Elder Law, Trust, Estate, & Guardianship Attorney and the owner of Kootenai Law Group, PLLC in Coeur d’Alene. If you have questions about estate planning, probates, wills, trusts, powers of attorney, guardianships, Medicaid planning, or VA Benefit planning, contact Kootenai Law at 208-765-6555, [email protected], or visit www.KootenaiLaw.com.

This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.