Understanding and Managing Beneficiary Designations: A Critical Component of your Estate Plan

Estate planning isn’t just about having a well-drafted will or trust. One of the most important yet frequently overlooked aspects is the proper management of beneficiary designations. These designations can override your will and significantly impact how your assets are distributed after you die. In this article, I’ll discuss why these designations matter and how to manage them effectively.

What Are Beneficiary Designations?

Beneficiary designations are legally binding instructions that direct financial institutions to transfer specific assets to designated individuals or entities upon your death. These transfers occur outside of probate, meaning they happen independently of your will’s instructions.

Accounts with Beneficiary Designations

Many financial products, such as life insurance policies, retirement accounts like 401(k)s and IRAs, rely on beneficiary designations. When you complete a beneficiary designation form, you name one or more individuals or entities (such as a trust) to inherit the asset. These designations take priority over any instructions in your will or trust. For example, if your will states that your estate should be divided equally among your children, but your retirement account lists only one child as the beneficiary, the account will pass entirely to that child.

Uncoordinated beneficiary designations can significantly alter your estate plan. Therefore, it is important that you review them periodically to ensure they pass according to your intentions. For example, years ago a grieving spouse called me. Her husband had acquired an insurance policy before they got married and named his brother as the beneficiary. He never updated his beneficiary designations. When he passed away suddenly and unexpectedly, the proceeds of the policy passed to his brother, not his wife and new baby.

Understanding Primary and Contingent Beneficiaries

The structure of beneficiary designations typically involves two tiers of beneficiaries. Primary beneficiaries stand first in line to receive your assets. Contingent beneficiaries serve as your backup plan, inheriting only if all primary beneficiaries predecease you or disclaim their inheritance.

For example, a policy owner designates their spouse as primary beneficiary (100%) of their life insurance policy, and their siblings as contingent beneficiaries (50% each). If the spouse predeceases the policy owner, the insurance proceeds would be split equally between the siblings.

Why Regular Review is Essential

Life changes necessitate regular review of your beneficiary designations. Significant life events such as marriage, divorce, the birth or adoption of children, or the death of a beneficiary should trigger an immediate review. Additionally, moving to a different state or experiencing major changes in estate tax laws may require adjustments to your designations.

How to Change Your Beneficiary Designations

Updating beneficiary designations is typically straightforward but must be done carefully. Most financial institutions provide beneficiary designation forms that allow you to make changes. To update a designation:

1. Obtain the Correct Form: Contact your financial institution or insurance company to request the appropriate form.
2. Complete the Form Accurately: Clearly name your new beneficiaries, including their full legal names, relationships, and, if applicable, Social Security Numbers. If your estate plan creates trusts for beneficiaries, consult your attorney to learn how to direct assets to the established trusts.
3. Submit the Form: Return the completed form to the institution and confirm receipt to ensure the change has been processed.
4. Keep Records: Retain copies of the updated forms for your files and share them with your estate planning attorney to maintain consistency with your overall plan.

Taking Action Now

The time to review your beneficiary designations is before a crisis occurs. Begin by gathering your account statements and reviewing current designations. Address any outdated or missing designations promptly, document your choices, and establish a regular review schedule. This proactive approach can prevent significant complications for your loved ones in the future.

Conclusion

Beneficiary designations play a vital role in your estate plan, often determining how significant assets are distributed. By naming primary and contingent beneficiaries, coordinating designations with your estate plan, and reviewing them regularly, you can ensure your assets pass to the right people in the right way.

If you have questions about your designations or need assistance updating them, consult an experienced Texas and North Carolina estate planning attorney for personalized guidance to ensure your designations align with your overall estate plan.