Check Your Beneficiary Designations: Why It Matters Now
When was the last time you checked the beneficiary designations on your accounts? We often review our retirement, investment, and bank account balances regularly, but many people neglect to check who will receive the funds when they pass away. It's crucial to ensure that these designations are up to date—especially in the wake of life changes like marriage, divorce, or the birth of children.
Beneficiary designations are a key component of your estate plan and can be a powerful tool in ensuring your assets are passed on quickly and efficiently. These designations supersede any provisions in a will or trust and must be reviewed periodically to align with your current wishes. Without reviewing your beneficiary designations, you risk having your assets go to the wrong individuals or being tied up in probate, which could delay your family’s ability to access these funds.
Accounts That Have Beneficiary Designations
Many types of financial accounts allow you to designate a beneficiary, including:
Retirement plans (401(k), 403(b), IRA, Roth IRA)
Life insurance policies
Annuities
Checking and savings accounts
Certificates of Deposit (CDs)
Health savings accounts (HSAs)
529 college savings plans
Employer-sponsored benefits (e.g., group life insurance, employee stock plans)
Brokerage accounts
Mutual funds
U.S. savings bonds
Some states even allow for real estate to pass through a transfer-on-death (TOD) deed or Ladybird deed, bypassing the need for probate. For more information on how beneficiary designations work for different types of accounts, it’s helpful to consult with an estate planning lawyer to ensure that your beneficiary designations are properly updated. You can reach out to Wiszneauckas Law Estate Planning and Intellectual Property for further assistance.
How a Beneficiary Designation Works
Beneficiary designations are straightforward but critical components of an estate plan. When you designate a beneficiary for an account or policy, that person (or entity) automatically receives the money upon your death, bypassing probate. This can ensure that the funds are transferred quickly and directly without the need for court oversight.
Beneficiaries can include individuals such as a spouse, child, or friend, or even an organization or charity. It is important to keep in mind that if no beneficiary is named, the account may be subject to probate. In the case of a trust, a beneficiary can be the trust itself, which helps to ensure a smoother transition of assets in line with your overall estate planning goals.
Naming Primary and Contingent Beneficiaries
In most cases, you’ll want to designate a primary beneficiary (the person who will receive the funds first). Additionally, it is a wise practice to name a contingent beneficiary in case the primary beneficiary is unable or unwilling to accept the funds. If neither the primary nor the contingent beneficiary is available, the funds may be subject to probate.
It is also important to review the rules around spousal beneficiary designations. Some jurisdictions and policies may require that your spouse be the primary beneficiary and receive a certain portion of the account before other beneficiaries can be named.
To ensure your assets are distributed according to your wishes, consider working with a financial adviser or estate planning attorney. For example, in some cases, naming your trust as a beneficiary can provide an added layer of protection and help avoid any complications with beneficiaries predeceasing you.
Why You Need to Review Beneficiary Designations Regularly
Beneficiary designations are often overlooked because they are easy to forget once the forms are filled out. However, it’s crucial to review these designations regularly—especially after significant life events such as:
Divorce
Marriage
Birth or adoption of children or grandchildren
Loss of a loved one
End of a relationship
Account closure and moving assets
Even if you think nothing has changed in your life, it’s a good practice to check your beneficiary designations every three to five years to make sure they align with your current wishes. Your estate planning strategy may have shifted, and your beneficiary designations should reflect those changes.
If you’ve decided to update your will or estate plan, be sure to also review the beneficiary designations on all your accounts. Many people mistakenly believe that their will overrides these designations, but in reality, the beneficiary designation on the account takes precedence.
How to Change a Beneficiary Designation
Changing a beneficiary designation is usually simple, but the process can vary depending on the account type. Many institutions allow you to update your beneficiaries online, while others may require you to complete paperwork. Make sure to:
Provide the full legal name of the beneficiary, along with their relationship to you
Include additional information such as contact details, Social Security number, and date of birth, if required
Save any confirmation from the account administrator to ensure that the change has been processed
For retirement accounts, life insurance policies, or other financial instruments, you may need to provide your spouse’s written consent if you wish to designate someone else as your primary beneficiary.
What Can Happen When You Do Not Update Beneficiary Designations
Updating your beneficiary designations is one of the most important aspects of estate planning. It's easy to think that a will or trust covers all your assets, but in reality, beneficiary designations hold precedence. When you fail to review and update these designations, especially after significant life changes, you risk causing confusion, delays, and unnecessary expenses that could be easily avoided. In some cases, not keeping these designations up-to-date could lead to your estate being tied up in probate court, resulting in a lengthy and costly process.
1. Inaccurate or Outdated Beneficiary Designations
If you neglect to update your beneficiary designations, the individual or entity you initially named may not be the one you want to inherit the asset. This situation is especially common after life events such as:
Divorce: If you divorce and forget to remove your former spouse as a beneficiary, they could end up inheriting funds you intended for someone else, or worse, they could receive assets even if you remarried.
Marriage: If you remarry and don’t update your beneficiary designations, your new spouse might not inherit your assets, even if you intended them to be the primary beneficiary.
Birth or Adoption of a Child: If you have a child after you’ve designated beneficiaries, your current beneficiaries might inherit assets without your child being considered, especially if your estate planning didn’t account for the new addition.
Death of a Loved One: If a beneficiary passes away, and you haven’t updated your designations, your assets may go to the wrong person or entity.
These situations can cause significant problems if the beneficiaries listed in your documents no longer align with your intentions, or if your new life circumstances haven’t been reflected in your beneficiary designations. For instance, an ex-spouse receiving assets can lead to family conflict or financial hardship for your current spouse and children. Conversely, forgetting to add a new child could lead to that child being left out of your legacy altogether.
2. Probate: The Unintended Consequences of Missing or Incorrect Beneficiary Designations
When a beneficiary designation is outdated or missing, and there is no contingent beneficiary in place, the asset may be forced into the probate process. Probate is a court-supervised process used to administer the estate of a deceased person. It can be costly, time-consuming, and may delay the distribution of assets to the rightful heirs. The probate process can take anywhere from a few months to several years, depending on the complexity of the estate and whether any legal challenges arise.
Probate involves several steps, including:
Validating the Will: If there is a will, the court must verify its validity. If there’s no will, state intestacy laws determine how the estate is divided.
Paying Debts and Taxes: Any outstanding debts, taxes, and liabilities need to be paid before assets can be distributed to beneficiaries.
Appointing an Executor: The court will appoint an executor or personal representative to manage the estate, who is responsible for gathering the deceased’s assets, paying debts, and distributing the remaining assets.
Distributing Assets: After debts and taxes are paid, the assets are distributed to the beneficiaries named in the will. If no will exists, the court follows state laws to decide who gets the assets.
Key Problems with Probate
Probate can be avoided if the beneficiary designations are correctly filled out and up-to-date, but failure to do so can cause a lot of challenges:
Delays: Probate can delay the distribution of assets, sometimes for months or years. This is problematic for the beneficiaries, especially if they need the funds for ongoing living expenses or other important financial needs.
Costs: Probate can be costly, and the costs will be paid from the estate’s assets, reducing what’s left for your beneficiaries. These costs can include court fees, executor fees, and attorney fees, which may add up to thousands of dollars.
Public Disclosure: Probate is a public process, meaning your will, your debts, and your assets become a matter of public record. This exposes your personal financial details, and can sometimes lead to unwanted attention from creditors or even long-lost relatives who might want to make claims against the estate.
By ensuring that your beneficiary designations are current, you can bypass the probate process entirely for those assets, ensuring a quicker and more efficient transfer to your loved ones.
3. Intestacy Laws and Their Impact on Asset Distribution
If no beneficiary is named, or if the primary beneficiary and contingent beneficiary both predecease you, and you do not have a will, your estate will be subject to intestacy laws. These laws vary by state but generally dictate that your estate is distributed to your closest relatives, which might not align with your wishes.
For example:
Spouse and Children: If you're married and have children, your spouse might receive a portion of your estate, with the remainder divided among your children. However, the division may not reflect what you would have preferred—such as leaving more to one child or a family friend.
No Will or Trust: Without a will or trust, your estate could be divided according to state rules, with potential complications arising if family dynamics are complex (e.g., estranged relatives, stepchildren, or ex-spouses).
In such cases, assets that you had hoped would go to a specific individual or organization could end up being divided in a way that you didn’t intend. For instance, if you wanted to leave your assets to a charity or a close friend, intestacy laws would likely direct them to family members instead.
Additionally, if someone contests the distribution, it can lead to lengthy court battles, which are expensive and emotionally taxing for your loved ones. To avoid this, you need to regularly update your beneficiary designations and ensure that your estate plan reflects your current intentions.
4. Problems with Trusts and Beneficiary Designations
Even when there’s a trust in place, beneficiary designations that are out of date can cause complications. If you’ve created a revocable living trust to manage your assets, it’s critical to ensure that all beneficiary designations on your retirement accounts, insurance policies, and other financial instruments are aligned with the terms of the trust.
For instance, if your trust is meant to receive the bulk of your assets upon your death but you have named a different beneficiary on your life insurance policy or IRA, the beneficiary designation will override the trust. This can lead to mismatches between your intended estate plan and the distribution of assets.
To avoid this, you should:
Review all beneficiary designations to make sure they align with your trust’s instructions.
Consider naming the trust itself as a beneficiary, which can help maintain the integrity of your overall estate plan and ensure that assets flow into the trust smoothly.
5. Other Potential Complications
Here are some additional complications that can arise when you neglect to update your beneficiary designations:
Incompetency or Incapacity of Beneficiaries: If your beneficiary is incapacitated or not capable of handling financial matters, there may be challenges in accessing and managing the assets left to them. In some cases, a legal guardian or conservator may need to be appointed, which can add complexity to the distribution process.
Disinheritance Confusion: If a family member is accidentally left out of a beneficiary designation due to outdated information, they may contest the will, causing legal disputes and delays.
Tax Implications: Depending on how assets are distributed, your estate could face significant tax liabilities. Regularly checking your beneficiary designations allows you to anticipate potential tax deductions or obligations that might arise for your heirs.
6. The Importance of Working with an Estate Planning Professional
The potential consequences of not regularly updating your beneficiary designations cannot be overstated. To ensure your intentions are accurately reflected and your family avoids unnecessary complications, it’s crucial to work with an estate planning attorney.
An attorney can help you:
Ensure that your beneficiary designations align with your will, trust, and overall estate plan.
Guide you in choosing the right beneficiaries for specific assets, taking into consideration taxes, financial needs, and family dynamics.
Help you set up a trust to protect assets for your beneficiaries and ensure smooth transitions.
Advise you on how to handle minor children or incapacitated beneficiaries, including appointing a legal guardian or managing assets through a trust.
Ensure that your estate is not subject to probate, and help you navigate complex estate and tax laws to minimize costs and delays.
Simple Form, Complex Estate Planning Considerations
While completing a beneficiary form may seem like a simple task, it has a profound impact on your estate plan and your loved ones. Even small estate planning details, such as ensuring that your beneficiary designations are accurate and up-to-date, can have significant implications.
A beneficiary designation cannot be changed after you are gone. To ensure that your account money and property go where you want and how you want, talk to an estate planning attorney. An estate plan should be updated regularly to account for life changes and ensure that your legacy goals are fully achieved.
For further guidance on how to effectively manage your beneficiary designations and ensure your estate plan aligns with your intentions, contact Wiszneauckas Law Estate Planning and Intellectual Property or schedule a consultation to discuss how we can help secure your future. For more frequently asked questions regarding estate planning, visit our FAQs page, or contact us for personalized assistance.