Estate Planning Is Not About What You Own... It's About What You Value.

Beneficiary designations

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When was the last time you reviewed the beneficiary designations on your retirement plans, insurance policies, or even your basic cash accounts?

Making sure that beneficiary designations are set up correctly is critical to making any estate plan operate properly.  Most people are unaware that beneficiary designations will control the distribution of an account or policy, regardless of what a will or trust may say about it’s distribution.

We’ve seen numerous wills and trusts that direct the distribution of life insurance policies, IRAs and 401(k) plans to “X”, but have witnessed the funds under those policies and accounts eventually wind up in the hands of someone else, because the account/policy beneficiary designation instructed that it be distributed to “Y”.  That is because your account or policy is a contract with another institution and the beneficiary designation you signed is a part of that contract with that bank/investment company/insurance company.  So, the account passes upon your death “by operation of law”, or in other words, under the terms of the contract.

Because the contract controls the distribution of the funds, it does not become subject to your will or your trust terms.  Therefore, it is critical that you review the beneficiary designations of your accounts and policies and make sure that they’re properly coordinated with your estate planning documents if you want those estate plans to be effective.

It’s also important to ensure that the proper people are listed in your beneficiary designations.  We often see a client that has named just one of their five children as the beneficiary of an account or policy, with the expectation that the one child is going to “share” the account/policy with his/her siblings.

Unfortunately, this creates a number of other problems and is never an appropriate shortcut to avoid the 60 seconds it takes to write down all five names.  It will likely cause an IRA or 401(k) to be cashed out and the income tax paid (meaning the tax advantaged growth is lost in addition to 30% or more of the account value), then the one child may have gift tax issues in trying to share the remainder of the account with his siblings.

Of course, we’ve seen numerous instances where that one child has also disappeared with those funds, as he/she is under no legal obligation to share them.  We would all hope that our children would not do something like this, but in our line of business, the prospect of free money does the worst things to people.

The bottom line is that understanding how your beneficiary designations are organized is critical to ensuring that your estate plans are carried out as you desire.  Get your plans reviewed by a competent estate planner in order to guarantee that will be the case.