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Beneficiary Designations: One of the Most Important Parts of your Estate Plan Thumbnail

Beneficiary Designations: One of the Most Important Parts of your Estate Plan

Estate Planning

When it comes to estate planning, many people assume that as long as their estate planning documents (will, powers of attorney, and perhaps a living will or health care surrogate designation) are up to date, then everything else will be okay.  While keeping your estate planning documents up-to-date is important, a lot of people overlook beneficiary designations.  

Why are beneficiary designations so important?  There are a LOT of reasons, many of which we’ll cover in this article.  In this article, we’ll go over beneficiary designations in a little more depth, by covering:

  • What exactly are beneficiary designations, and what types of financial accounts they cover
  • What types of beneficiary designations you should expect to know about 
  • Why your legal documents don’t take the place of beneficiary designations
  • Common mistakes people make with their beneficiary designations and how to avoid them

What is a beneficiary designation?

Simply stated, a beneficiary designation instructs a financial institution to send financial assets when the account owner passes away.  This could be (and is usually) money, but it could also be other assets, such as stocks, bonds, mutual funds, or other financial instruments.  

What types of financial accounts do beneficiary designations cover? 

Although each financial institution is different, beneficiary designations can be used for banking accounts, investment accounts, retirement savings accounts (like IRAs), or insurance policies. 

What types of beneficiary designations do I need to know about? 

Here are some terms your financial institution might use when talking about beneficiary designations: 

Payable on death (POD):  POD designations are typically used by banks or credit unions to transfer assets from banking accounts. 

Transfer on Death (TOD):  TOD designations are commonly used to transfer investments. 

Primary beneficiary:  One (or more) legal entity designated to receive a share of assets in the account holder's account in case of death.   A beneficiary doesn’t need to be a person.  A beneficiary could be a trust or a charity, although you may want to discuss this in more depth with your financial advisor or estate attorney

Contingent beneficiary:  Contingent beneficiaries are named in the case one or more primary beneficiaries predecease the account owner.  A common example would be grandchildren who would be named to inherit money if their parent(s) die first. 

Per stirpes & per capita:  When naming contingent beneficiaries who are descendants of the primary beneficiary, you may encounter these terms.  These are two different ways in which money passes to contingent beneficiaries in case one (or more) of the primary beneficiaries predeceases the main account holder.  Read this article to learn more about per stirpes and per capita beneficiary designations.  

Why aren’t my legal documents enough?  Why do I need to have beneficiary designations? 

The simples answer is this:  beneficiary designations bypass the probate process.  

If you’re unfamiliar with the probate process, here’s a short (and overly simple) explanation:

  • You pass away
  • Your will directs where your assets go, and names someone as the executor of your estate
  • Hopefully, your executor will be able to take care of this for you.  Most likely, they’ll hire an attorney to make sure everything is done legally 
  • Sometimes, people disagree on what you intended.  This happens a lot with:
    • Creditors who want to be paid money you owe them
    • Family members who disagree on what your intentions were
    • People who come out of the woodwork to lay claim on your property (this usually only happens to rich people—no one is coming out of the shadows to start paying down your credit card bills)
  • Your attorney is legally required to file a notice with your local jurisdiction (or multiple, if you have complicated estate issues).  This ensures that people have enough time to file a claim (if they have a reason to do so) 
  • If you didn’t do any of this, then your estate will likely be distributed in accordance with your state’s laws.  This is known as intestate.
  • The more time, money, and energy this process consumes, the less is left over for your heirs

Beneficiary designations avoid all of this.  While we’re not lawyers (and can’t give legal advice in any of the 50 states), we’ve yet to see a situation in which a financial institution has difficulty in quickly disbursing money when a beneficiary designation is correctly on file.   And truth be told—aside from family sentimental items or major non-financial assets (like real estate), most arguments are about the money.  If you want to minimize the negative feelings amongst your loved ones after you pass away—make sure your beneficiary designations are up to date.

Common beneficiary designations mistakes & how to avoid them 

Here are some common mistakes we see a LOT.   Many of these are rather simple and easy to avoid if you take the time to do so.

  1. Not having beneficiary designations on file.  When you open an account, your financial institution might offer to help you with this.  But they won’t automatically do it for you.  Many people don’t make it past this crucial first step.
  2. Not reviewing beneficiary designations regularly.  What happens if you get divorced, then remarried?  If you pass away without changing your beneficiary designations, it’s likely that your ex will be in for a pleasant surprise.  And your current will be left holding the bag.  
  3. Not completing primary and secondary designations.  Sometimes, this might not be a mistake—you simply don’t have that many people in your life.  But in many cases, the intent is for the money to go on to heirs (like extended family members), but it’s never documented.  
  4. Not accounting for special circumstances.  What if your contingent beneficiaries (like minor grandchildren) are too young to inherit the money directly?  What if someone’s sudden inheritance disqualifies them for financial aid (like in the case of someone who is severely disabled)?  If you have special circumstances, you definitely need to discuss them you’re your estate attorney or financial advisor.   
  5. Naming the wrong beneficiary.  Sometimes, mistakes happen, even with the best of intentions.  Remember examples of people who were on the government’s ‘no-fly’ list, who ended up as cases of mistaken identity (here’s an article with some humorous examples)?  Don’t let this happen with something as serious as your money.  Take a look for things like name changes (in the case of marriage or divorce), typos, or other mistakes that could be misinterpreted by your financial institution.  
  6. Not having consistency across all accounts.  It’s great that you made the change to your investment accounts and your insurance policies.  But if you didn’t make that change to all of your accounts, perhaps your money isn’t completely going to where you intended.  Simply stop and ask yourself, “If I died today, where would all of my money go?  Is this okay?”  Then go through all of your accounts to make sure they’re up to date. 

Low-hanging fruit, huh? We’re not talking advanced tactics here—just the basics. And for the vast majority of people reading this article, that’s all we need to discuss.

Conclusion

While beneficiary designations don’t replace your estate planning (you still need to do this with an attorney), they are an important part of your estate plan.  And they’re a part of your estate plan that your lawyer probably isn’t going to do on your behalf.  So to make sure your estate plan is intact, talk with your estate attorney or financial advisor about this, and update your beneficiary designations today! 

If you don’t have a financial advisor but are interested in working with one, you can go to this page to learn more about how we work with clients (hint:  we help people with the beneficiary designations and regularly review them). 

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The foregoing content reflects the opinions of Lawrence Financial Planning, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.  Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.   Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will recover or react as they have in the past. 

 


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