Many intensely litigated estate disputes arise our of how an individual handles beneficiary designations on certain accounts. A “Designated Beneficiary” is a person or trust selected by an owner of an account to inherit the account balance payable upon the death of the account owner. Beneficiary designations are typically used for life insurance, retirement accounts (IRAs & 401Ks), brokerage accounts, and sometimes on bank checking or savings accounts. Designating a beneficiary on an account is often advisable and offers the substantial benefit of the account assets passing outside of probate. However, these should work in conjunction with your other Estate planning documents not against them. Improper or inconsistent beneficiary designations can create tragic consequences for your heirs through unanticipated estate litigation.
Tips to Avoid Beneficiary Designation Pitfalls
- Separation / Divorce: If you get separated or divorced, immediately change all prior beneficiary designations.
- Beneficiary Designations are Not Trusts: You cannot write a comprehensive trust into a one line beneficiary form, so don’t try to. A far superior alternative is to set up a revocable living trust that will control the disposition of your assets, and name your living trust as the beneficiary for this account.
- Don’t conflict your Will: If your Will contains provisions designating where specific account assets will pass, a conflicting beneficiary designation on that same account will trump your Will. This can lead to messy estate disputes among heirs. One side typically argues the “decedent’s intent” in the Will and the other side argues “the letter of the law” as to where the account assets should be distributed.
- Complete policy forms correctly: I have seen several beneficiary designations that were disallowed because they were not made on the proper form or with the correct legal language. Each policy or account will likely have a different form that must be completed correctly. Correctly completing beneficiary designations is part of your estate planning, so seek guidance from your estate planning lawyer.
Incorporate Beneficiary Designations into a Comprehensive Estate Plan
Knowing where all of your assets will pass upon your death is critical and a vital part of your estate planning. However, beneficiary designations do not replace the need for Wills, Trusts, and a comprehensive estate plan.