By Anne Marie E. Ashworth, CFP®
When developing a comprehensive estate plan, it is critical to understand which, if any, of your assets have (or could have) a beneficiary designated. Many times, a will and trust documents may not be enough to ensure your estate is distributed via your wishes. Beneficiary designations supersede the direction of a will or trust. If beneficiary designations are not thoughtfully updated and periodically reviewed, there may be unintended consequences.
The types of benefits or accounts that are transferred via beneficiary designation include but are not limited to:
• Employer-provided retirement benefits
• Individual Retirement Accounts
• Employer-provided life insurance policies
• Individual life insurance policies
• Payable-at-death or transfer-on-death financial and bank accounts
Each account or policy can have primary and contingent beneficiaries. The contingent beneficiary (or beneficiaries) is the individual(s) or trust who will receive the assets in the event that the primary beneficiary is not alive at the time of your death.
What happens if I don’t name a beneficiary?
If you don’t have a beneficiary designation, your assets will transfer according to the asset’s default beneficiary provision. Every custodian has different rules, depending upon their account agreement for how an asset will be distributed if there isn’t a beneficiary named. Many times, if a beneficiary isn’t designated, the account will be distributed to an individual’s estate. If an asset is passed to your estate, it will go through the probate process, which will incur additional estate expenses, delay the distribution, and may expose the asset to creditor claims.
When specialized advice is required
In some instances, simply naming a direct beneficiary designation is not appropriate. Situations that may require alternative language for a beneficiary designation include:
• A beneficiary is a minor
• A beneficiary has not reached the age of maturity
• A beneficiary has potential creditor risks
• A beneficiary has a disability or health concern
Consult with an estate planning attorney concerning the proper beneficiary designation. In many cases, the beneficiary designation will be directed to a trustee of a trust. For example, if you wish to name the contingent beneficiary of your 401(k) as your minority child, specific language is necessary. A minor child is not legally permitted to receive retirement assets outright; therefore, the state would appoint a legal guardian if you hadn’t done so, which is a lengthy and costly process. That guardian would then determine how the managed and spent – which may not coincide with your wishes. Instead, you can control how the assets are managed and spent by working with an attorney to determine specific beneficiary language to name a guardian under the Uniform Transfers to Minors Act (UTMA) or establishing a trust for the benefit of your child.
Simply creating a trust within your estate documents is not enough; the beneficiary designation needs to direct the assets to the specific trust.
Payable-at-death or transfer-on-death financial accounts
Many banks or brokerage firms allow an account owner to add a “payable-at-death” (POD) or “transfer-on-death” (TOD) designation to the account. These designations operate in the same manner as a beneficiary designation on a retirement account or life insurance account. It is important to understand that the named beneficiary for POD or TOD can claim the asset upon the owner’s death. The designation, like a beneficiary designation, trumps the terms of a will or trust.
Why and when should I review my beneficiaries?
It is important to review your beneficiary designations periodically to ensure that your accounts transfer to the people you want to inherit them. For example, if you designate your spouse as a beneficiary by name, later divorce and remarry without updating your designation, assets may go to your former spouse even if your will instructs otherwise.
A good rule of thumb is to review your beneficiary designations annually or when you:
• Establish, review, or update your will or trust.
• Experience a life event including (but not limited to) birth, marriage, divorce or death of an existing beneficiary.
• Start a new job with new employer-sponsored benefits.
• Leave an existing job and subsequently rollover a 401(k) or Individual Retirement Account.
Beneficiary designations should be thoughtfully made in accordance with other estate planning documents. Consult your estate planning attorney or financial advisor to ensure your beneficiary designations are updated properly.
Anne Marie E. Ashworth is a 2015 graduate of Virginia Tech with a BS in Business, where she majored in Finance with a financial planning concentration. She joined Abacus in June of 2015 and earned the CFP® designation in May of 2017. As a member of the financial planning team, Anne Marie works closely with clients to understand their objectives in order to develop, implement and monitor a comprehensive financial plan to achieve those goals.
Abacus is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.5 billion on behalf of its 240 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.