Beneficiary designations are contractual pay-on-death clauses for certain kinds of assets like life insurance and qualified retirement accounts as well as some brokerage and bank accounts. When the owner of the account or policy passes away the asset passes directly to the person designated. Life insurance and individual retirement accounts are generally never transferred into the trust because their designed to go straight to the designated beneficiary. When the owner dies these types of accounts can reach their target without the probate of a will or living trust.
Some people may be in the unique situation of only having assets consisting of accounts or policies with beneficiary designations. Although rare, these individuals may not have a need for either a will or trust. For most of us, a will or trust is essential and works alongside the beneficiary designations to transfer property.
We always advise our clients to review their beneficiary designations. We frequently find that clients are not aware of who is designated, or they have never named beneficiaries.
There are things you should be aware of if you plan on using beneficiary designations to pass your wealth to your heirs. When that time comes, to make it easier on your executor (for a will) or successor trustee (for a trust) your estate should leave enough cash available for your executor or trustee to pay final expenses. If the account with the beneficiary designation goes to the designee, and there are no other assets, the executor or trustee may not have the resources to settle the debts.
Another word of caution relates to beneficiaries who receive public benefits. If a beneficiary receiving public benefits such as Medicare receives a large sum of cash through the beneficiary designation the recipient may loose their government benefits. Extra planning is needed to protect these individuals and should probably involve a trust.
Also make sure that your beneficiary designations are consistent with the rest of your estate plan. Sometimes a will or trust attempts to give the property to someone other than the person who was previously named as the account of policy beneficiary. The beneficiary designation will generally prevail over the trust or will designation.
The Living Trust Source recommends that if you’re just starting your estate planning, you begin by reviewing beneficiary designations. You may discover that you have assets for which you were unaware that you could name a beneficiary. If you have already done some estate planning, it may be a good time to revisit your beneficiary designations to ensure they are in accordance your wishes and do not conflict with a will or trust.
Beneficiary designations are usually a critical component in most estate plans. They are a reliable way, and often the only means, of getting a qualified accounts and life insurance policies to the right person while avoiding probate for those assets. Because many assets do not allow for beneficiary designations, these designations usually aren’t enough for keep everything out of probate.
Attorney at Law
1Source Law & Living Trust Source