The Estate Planning Detail Often Overlooked: Why Beneficiary Designations Might Be More Important Than You Think

Retirement accounts, life insurance policies, and certain investment accounts pass via beneficiary designations.  When the holder of these accounts passes away, the institution holding the account will distribute the funds directly to the named beneficiaries. 

Account beneficiary designations don’t just “fit into” your estate plan automatically...they can completely bypass and override it.  What this means practically is that outdated beneficiary designations still stand; they can unintentionally disinherit individuals, (or allow someone unintended to inherit), and they can disrupt a well-thought-out estate plan if not aligned with the plan as a whole.

Generally, it is recommended that an estate plan be reviewed every 3-5 years or after a major life event.  As part of a comprehensive estate plan, your trusted estate planning attorney should also assist you with reviewing your beneficiary designations.

Why Do Issues with Beneficiary Designations Arise So Often?

People assume that once they have signed their estate plan, they have covered everything, and because beneficiary designations seem like such a simple detail, they are rarely revisited and often overlooked.

However, it is essential that these designations are consistent with your current wishes because the institutions holding the accounts with named beneficiaries do not consider any estate plan you may have established.  They simply distribute according to the designations and act as if the estate plan never existed.

 How Often Should I Think About This?

As you grow and change through life, your estate plan should change with you, and beneficiary designations must change with the estate plan as well.  As previously mentioned, estate plans and beneficiary designations should be reviewed after major life events, or on a regular basis every 3-5 years.

The most common major life events include, but are not limited to:

• Marriage
• Divorce
• Second Marriage
• Birth of a Child(ren)
• Significant Inheritance

Not reviewing beneficiary designations following these events or for an extended period of time may result in unfavorable consequences.

For example, spouses are commonly named as the beneficiary on these accounts.  If an individual remarries and the original beneficiary is never changed, in some circumstances, the account will be transferred directly to the former spouse, depending on the laws in your state.  Even if a carefully drafted estate plan is established, it cannot redirect those funds if the beneficiary designation states otherwise, because the beneficiary designation is a binding contract between you and the institution holding the accounts.

Retirement accounts in particular should be addressed to avoid these types of scenarios because they are governed by unique tax rules related to the distribution of the accounts.  Unintended distribution of retirement accounts can cause complications for your heirs by forcing unwanted withdrawals, accelerating tax consequences, and losing long-term tax deferral.

Regardless of account type, it is vital that beneficiary designations for all accounts are aligned with your current desires.

How Do I Easily Address This?

On the bright side, changing beneficiary designations is a relatively simple process.  You can contact the institution holding the accounts for the required forms to change beneficiaries.  If you have a financial advisor, reach out to them to confirm who you currently have named as beneficiaries.

We are happy to help. If you would like our assistance, please contact our office to schedule a talk with our estate planning professionals so we can assist you with ensuring your beneficiary designations align with your estate plan.

So, when was the last time you reviewed your beneficiary designations?