Beneficiary Designations - The Stealth Will

Why Your Beneficiary Designations Are More Important, and More Dangerous, than You Think

Many of our clients spend hours pouring over the estate planning documents we prepare, cogitating on the best way to provide for their children, and insuring that their estate planning documents reflect a thoughtful and detailed plan. But one of the biggest mistakes I see in estate plans that come into my office are the neglected and ill-thought out beneficiary designations.

Many of our clients will transfer more wealth via their beneficiary designations then through their Last Will and Testament or Revocable Trust. Beneficiary designations control distribution of life insurance and retirement assets, including IRAs, 401(k)s, 403(b)s, and the Thrift Savings Plan (TSP). In addition, many clients have set up transfer on death (“TOD”) and/or payable on death (“POD”) designations on taxable investment or cash accounts.

Remember that a beneficiary designation is just a contract between you and some entity, whether it be your employer, a life insurance company, or a fiduciary holding, as custodian, your retirement accounts. The beneficiary designation determines who they will pay, and in what percentages. Distributions set up through your Last Will and Testament or Revocable Trust will not override the distributions set up through your beneficiary designations.

As clients and seminar participants have heard over and over again, I have 3 kids, 8 years old, 12 years old and 14 years old. They seem like great kids, but I have a trust in my estate planning that holds money for them until they are 40. However, if my beneficiary designation indicated that money would go to them, in their name, they would have unlimited access to those funds at 21, regardless of whether they were ready for the money or not.

Unfortunately that is exactly the scenario many clients walk into our office with. A trust that says hold the money safely for their kids, and beneficiary designation that says give it to them directly.

Here are some tips for making sure you address your beneficiary designations correctly:

  1. Your beneficiary designations are estate planning documents, every bit as important as your Last Will and Testament or Revocable Trust. Treat them that way. Make sure that they are dealt with at the same time and in the same way as your other estate planning documents.

    - If you are creating a trust for a spouse, child or anyone else, remember that the trust, not the individual, must be the beneficiary for the trust to work.

  2. If you are doing or updating your beneficiary designations yourself, read the instructions carefully. They may have specific instructions for how to represent a distribution to an individual or a trust.
  3. Make sure your beneficiary designation form is signed and dated. If there is a challenge to the designation or if there are multiple designations and it is impossible to determine which form is the most current, this can lead to delays and litigation after you die.
  4. Make sure your percentages add up to 100{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681}. This sounds silly, but is not at all uncommon to see beneficiary designations that only go to 99{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681}, or have 3 designations, with one person getting 50{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681}, one person getting 30{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681}, and the other person getting 10{93997c19cca2413204031df21c26e128a46aabe0f65d6d1b886d87d0d40a7681}.
  5. Make sure you deal with your contingent/successor beneficiaries. What happens if your primary beneficiaries do not survive you? Sometimes a form will deal specifically with that, and other times it is silent.
  6. When your life changes, you must change your beneficiary designations.

    - A divorce or property settlement will not always void a former spouse as the beneficiary. In the case of Federal benefits, it will never be enough to remove the former spouses rights.

    - Births, adoptions, marriage, divorce, and death should trigger a review of beneficiary designations. A failure to do so has left children disinherited and ex-spouses happily in possession of unintended windfalls.

Do not let your beneficiary designations become your estate plan or usurp your Will. Be active in dealing with them and making sure they conform to your intended estate plan.

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Norman B. Handler's Profile Image
Norman Handler started his legal career with the IRS, auditing estate tax returns and, in its National Office, developing estate tax policy. He moved into private practice, first as an associate and later as a partner in a large Montgomery County law… Read More

Marc S. Levine's Profile Image
Marc S. Levine has been practicing law since 1992, all with Handler & Levine, LLC, and its predecessor firms. Marc regularly assists individuals and families in preparing their estate plans, including drafting their wills, revocable trusts, trust… Read More

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