When contemplating the components of your estate plan, it’s important to remember the impact beneficiary designations can have on the transfer of your assets at death. It requires proper planning and consultation with your professional advisors to ensure your beneficiary designations are in line with your wishes to avoid any unintended consequences, some of which are outlined below:
1. Probate Avoidance: Assets such as life insurance, annuities, retirement accounts, etc. typically have a named beneficiary; these assets are known as non-probate assets and can be a great tool used to avoid probate. Certain states’ probate proceedings can be very costly and slow. Naming a beneficiary passes these assets directly to the individual, trust, or charity and bypasses the probate process, potentially saving on legal fees and giving beneficiaries access to funds more quickly. If no beneficiary is named, however, the asset will become a part of the decedent’s estate and can possibly trigger a probate that is otherwise not required.
2. Predeceased Beneficiary: It’s essential to understand the structure and priority of who receives your assets in the event a named beneficiary predeceases you. For example, many non-probate assets have the option to name a beneficiary “per stirpes.” Per stirpes typically means the assets pass to the descendants of the named predeceased beneficiary, rather than increasing the share any surviving named beneficiaries receive. This can be illustrated by the following example: Assume Fred has a life insurance policy and he named Mary and Tom as 50% beneficiaries each, per stirpes. Mary and Tom each have children of their own. Tom dies before Fred, and Fred never updated his beneficiary designations before he also died. With a per stirpes designation, Mary would receive her 50% share and Tom’s children would receive his 50% share. But, Fred could have intended that his surviving children (Mary in this case) receive 100% of the assets. So, it’s important to know not only who you’ve named, but how the various beneficiary designation forms you’ve filled out function; some institutions have a default method, so be sure to review carefully before making a decision.
3. Estate Plan Coordination: As previously mentioned, assets with a named beneficiary (if properly named) are non-probate assets. They will pass based on how they are designated, rather than passing to the beneficiaries named in your will. Therefore, it’s important to consider these non-probate assets when creating a comprehensive estate plan. If for example, your only substantial asset is a retirement plan that names your brother as beneficiary, but you named your sister in your will, there may not be anything left in your estate to pass to your sister. Furthermore, your will may have certain protections in place that you wish to replicate in your beneficiary designations; people often like to have their beneficiaries inherit assets via a trust rather than outright so that a trustee can manage the circumstances under which a beneficiary receives the assets. You can name a trust in your beneficiary designation rather than an individual to coordinate with your estate plan and provide the same protections you’ve laid out in your will.
4. Divorce: Some states have statutes in place that void spousal beneficiary designations in the event of a divorce. However, it’s important to understand how this could affect your particular asset and what your state’s laws are. Even if a state does provide this protection, an expensive court proceeding could potentially still be initiated; so it’s important to review and update your beneficiary designations (and estate plan overall) when any large life events occur.
Beneficiary designations are Boulay advisors can help navigate the nuances of beneficiary designations to make sure your wishes are met. Contact us today to learn more.