One critical component of estate planning that people often overlook is the beneficiary designations on their accounts. These can be as important as wills and trusts, so it is vital to keep them updated. Failure to manage your beneficiary designations can cause valuable assets to be tied up or even worse, to go to the wrong people after you pass away. Let’s look at how beneficiary designations work and what you should be doing to manage them.
What is a Beneficiary Designation?
For estate planning purposes, a beneficiary is the person who receives the proceeds from an account, trust, or other source. A beneficiary designation is the language in documents relating to that account that specify who will receive the proceeds when the account holder passes away. The document will usually also offer the opportunity to name alternate beneficiaries who receive proceeds if the original beneficiary has passed away. Beneficiary designation clauses may be associated with:
- Life insurance policies
- Brokerage accounts
- Bank accounts
- Retirement plans
- Other accounts
You can name a person or an entity, such as a trust, as the beneficiary of an account or policy. When you pass away, the assets in the account go directly to the beneficiary and do not become part of an estate or trust unless you name the trust as beneficiary. Beneficiary designations can be the most efficient way to transfer property to your loved ones after your death. But many people fail to take advantage of them.
Beneficiary Designations Override Almost Everything Else
In most cases, the beneficiary designation associated with an account, policy, or plan will be the most important factor in determining who receives the proceeds from that asset. If your will leaves all of your property to your second wife but your first wife is still listed as the beneficiary on your retirement plan, the funds in the plan will go to your ex, and the first wife may be left out completely.
Some states have laws specifying that divorce automatically revokes beneficiary designations that name a spouse as beneficiary. Maryland laws only revoke beneficiary designation to former spouses in certain specific circumstances. That means the burden falls on you to change all of your beneficiary designations after a divorce.
How to Manage Beneficiary Designations
First, you need to recognize which assets have beneficiary designations, and this may include more than you realize. For starters, property with a title, such as real estate and vehicles, can be titled in more than one name with a right of survivorship. This effectively serves as a beneficiary designation. If you have a vacation house titled in the name of yourself and your sister, for instance, and there’s a right of survivorship, then when you pass away, your share of the house will not pass to your heirs but the house will belong entirely to your sister. It is important to pay attention to the way your assets are titled.
Next, make a list of all accounts, life insurance policies, retirement plans and similar assets. At this point, you should check with your estate planning attorney to see how beneficiary designations for these accounts will fit in with your estate plan. It may work best to have a trust named as beneficiary, or even not to name a beneficiary in certain situations. Then once you have a plan, you will need to check with each institution to ensure that beneficiary designations they have on file match your objectives.
An Estate Planning Attorney Can Review Your Plan to Ensure it Still Meets Your Needs
Beneficiary designations are a key part of your estate plan, so it’s important to make sure they fit in with the other components of your plan. If you have questions about beneficiary designations or need a review of your estate plan documents, contact the Law Office of Ralph W. Powers, Jr., P.C. to learn more about how we can assist.