Are your beneficiary assignments undermining your Will?

Tim Watters |

 I find that clients neglect to review their beneficiary assignments and often a deceased parent (or a former wife) is named. While this may be your intent, poorly thought out beneficiary assignments can screw up allot of good planning.


Many people create a well-thought-out estate plan which includes the BIG 4 estate planning documents (Last Will and Testament, Durable Power of Attorney, Health Care Proxy and Living Will) and then they ignore their beneficiary assignments. Why is this a problem? Because the beneficiary assignment may for example:


·       Give money to a minor directly when the Will paid intended to pay the money out to a trust


·       Give the money to a disabled family member when the Will would have paid it out to a Special Needs Trust


·       Give the money to someone who is not the intended beneficiary

Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies, U.S. savings bonds, mutual funds, and individual stocks and bonds.

The best feature of beneficiary assignments is that they can quickly send out the money to the right party. Also, a spousal beneficiary of an IRA account may continue to enjoy tax deferral for years to come.  A non spousal beneficiary may continue to enjoy tax deferral for years to come but is required to take out a modest amount each year as a Required Minimum Distribution. 

The "fatal flaw" of beneficiary-designated assets is that because they are not considered probate assets, they pass "under the radar screen" and trump the directions spelled out in a will. This all too often leads to unintended consequences -- individuals who you no longer wish to inherit property do, some individuals receive more than you intended, some receive less, and ultimately, there may not be enough money available to fund the bequests you laid out in your will.

Not naming a Beneficiary is a NO NO!

Not naming beneficiaries or failing to update forms if a beneficiary dies can create a mess. For example, if the beneficiary of an IRA is a spouse and he or she predeceases the account holder and no contingent (second in line) beneficiary(ies) are named, when the account holder dies, the IRA typically would pass to the estate instead of the children directly as the account holder likely would have preferred. This not only would generate a tax bill for the children, it would also prevent them from stretching IRA distributions out over their lifetime.

Planning Priorities

Given these very real consequences, it is important to work with an attorney to ensure coordination between your beneficiary-designated assets and the disposition of property as it is spelled out in your will.

Also, I recommend reviewing my client’s beneficiary designations on a regular basis -- at least two years -- and/or when certain life events occur, such as the birth of a child, the death of a loved one, a divorce or a marriage, and update them, as necessary, in accordance with your wishes.