Creating a Will or Living Trust is an important part of estate planning, but those documents may not control every asset you own. Retirement accounts, life insurance policies, and certain bank or investment accounts can transfer according to beneficiary designations made directly with the financial institution or insurance company.
That makes beneficiary designations an important part of a comprehensive estate plan. Unfortunately, they are also easy to forget. A beneficiary may have been named when an account was opened many years ago and never reconsidered as marriages, divorces, births, deaths, relationships, and financial circumstances changed.
Reviewing those designations periodically can help ensure that your assets and estate-planning documents continue working toward the same goals.
Why Beneficiary Designations Matter
A beneficiary designation identifies who is intended to receive a particular asset after the owner’s death. Depending on the type of account or policy, these arrangements may allow the asset to transfer directly to the named beneficiary rather than being distributed through a Will or probate proceeding.
Common examples include 401(k)s, IRAs and other retirement accounts, life insurance policies, annuities, payable-on-death bank accounts, and transfer-on-death investment accounts.
This can make beneficiary designations valuable estate-planning tools, but it also means they need to be coordinated carefully with the rest of the plan. Changing a Will or Living Trust does not necessarily change a beneficiary designation maintained separately by a financial institution or insurance company.
Life Changes Can Make Old Designations Outdated
Think about how much can change over ten or twenty years. Someone may marry, divorce, remarry, have children or grandchildren, lose a spouse, become estranged from a family member, establish a trust, start a business, or experience significant changes in wealth.
Yet an old retirement account or life insurance policy may still contain the beneficiary instructions entered when the account was originally established.
Major life events are therefore a good reason to review beneficiary designations. Marriage or divorce deserves particular attention, as do the birth or adoption of children, the death or incapacity of a beneficiary, changes within a blended family, and significant revisions to an estate plan.
Even when nothing dramatic has happened, periodic reviews can uncover accounts or policies that have simply been overlooked.
Primary and Contingent Beneficiaries Both Deserve Attention
Many beneficiary forms allow an account owner to name both primary and contingent beneficiaries.
The primary beneficiary is generally first in line to receive the asset. A contingent beneficiary can provide an alternative if the primary beneficiary is unable to receive it.
Naming contingent beneficiaries can be particularly important because circumstances change. If a primary beneficiary dies before the account owner and the designation was never updated, the eventual distribution may depend on the account agreement, applicable law, and other circumstances rather than following the owner’s preferred alternative.
A beneficiary review should therefore examine more than the first name listed on the form. It should consider whether both primary and contingent designations continue to reflect the overall estate-planning strategy.
Retirement Accounts Require Special Planning
Retirement accounts deserve careful attention because they combine beneficiary planning with potentially significant tax considerations.
IRAs, 401(k)s, 403(b)s, and similar accounts are generally not treated exactly like ordinary bank accounts or real estate when creating an estate plan. The identity of the beneficiary and the relationship of that beneficiary to the account owner can affect the options available after death.
For that reason, simply naming a Living Trust as beneficiary of every retirement account is not automatically the appropriate strategy. Depending on the circumstances, naming a spouse, children, other individuals, or an appropriately structured trust can produce very different results.
Retirement beneficiary decisions should be coordinated with the estate plan and, when appropriate, with legal, tax, and financial professionals who understand the individual’s broader circumstances.
Life Insurance Should Coordinate With Your Estate Plan
Life insurance is another asset people sometimes forget when updating an estate plan. A policy may have been purchased years before a Living Trust was established or before significant changes occurred within the family.
The appropriate beneficiary depends on the purpose of the policy and the owner’s circumstances. Some policies are intended to provide directly for a spouse or other family members. In other situations, a trust may be considered when the proceeds are intended for minor children or beneficiaries who need additional financial management.
The important point is coordination. The beneficiary designation should support the purpose of the estate plan rather than operate independently from it.
Be Careful When Naming Minor Children
Parents naturally want to provide for their children, but directly naming a minor as the beneficiary of a substantial account or insurance policy can create complications.
Children generally cannot independently manage significant inherited assets. Depending on the circumstances, additional legal arrangements may be required to manage the property until the child reaches an appropriate age.
A properly designed trust can provide greater control over how and when inherited assets are managed and distributed. It can also allow parents to select the person or institution responsible for managing those assets rather than leaving important decisions to circumstances that arise after their death.
Families with minor children should therefore consider beneficiary designations as part of their broader guardianship and trust planning.
Don’t Forget Old Accounts and Former Employers
Retirement accounts from previous employers are especially easy to overlook. Someone may change jobs several times during a career and accumulate multiple 401(k)s, IRAs, insurance policies, or other financial accounts.
Those older accounts may contain beneficiary instructions that haven’t been reviewed in years.
Creating an inventory of retirement accounts, insurance policies, bank accounts, investment accounts, and other assets with beneficiary provisions can make an estate-plan review considerably more effective. It also helps identify accounts that family members might otherwise have difficulty locating later.
Your Beneficiary Designations and Living Trust Should Work Together
A Living Trust can be an important tool for controlling how assets are managed and distributed, maintaining privacy, and reducing unnecessary probate exposure. But beneficiary designations must be coordinated with the trust rather than considered separately.
Some assets may appropriately be owned by the trust. Others may remain outside the trust but transfer through beneficiary, payable-on-death, or transfer-on-death arrangements. Retirement accounts and life insurance often require their own analysis.
The objective isn’t necessarily to make every asset transfer in exactly the same way. It is to create a coordinated plan in which ownership, beneficiary instructions, and estate-planning documents all support the same intentions.
Make Beneficiary Reviews Part of Estate-Plan Maintenance
Estate planning should evolve along with your life. Reviewing beneficiary designations whenever a major life event occurs—and periodically even when circumstances appear unchanged—can help identify inconsistencies before they become problems.
A useful review includes retirement accounts, life insurance, annuities, bank and investment accounts with beneficiary provisions, and any other asset that may transfer according to instructions held by a financial institution.
The question is simple: If something happened to you today, would each of these assets go to the person or trust you currently intend?
If the answer is uncertain, it may be time for an estate-plan review.
Review Your Beneficiary Designations with an Arizona Estate Planning Attorney
Beneficiary forms may look simple, but the decisions behind them can have significant estate-planning consequences. Family circumstances, taxes, trusts, retirement-account rules, minor beneficiaries, and the overall structure of an estate plan can all influence the appropriate strategy.
Fishbein Law Group helps Arizona individuals, families, retirees, and business owners coordinate beneficiary designations with comprehensive Estate Planning, Living Trusts, Wills, Powers of Attorney, Probate Avoidance, Asset Protection, Trust Administration, and Business Succession Planning.
Keeping these pieces coordinated can help ensure that the estate plan you created continues to reflect the people you want to protect and the legacy you intend to leave.
Frequently Asked Questions
How often should I review my beneficiary designations?
Beneficiary designations should generally be reviewed periodically and after major life changes such as marriage, divorce, birth or adoption, the death of a beneficiary, retirement, or significant changes to your financial circumstances or estate plan.
Does my Will override the beneficiary on my retirement account or life insurance policy?
Assets with valid beneficiary designations are generally governed by those designations rather than instructions contained in a Will. This is one reason beneficiary forms should be coordinated carefully with the overall estate plan.
Should I name my Living Trust as the beneficiary of all my accounts?
Not necessarily. Different assets can require different planning strategies, particularly retirement accounts and life insurance. The appropriate beneficiary structure depends on your family circumstances, assets, tax considerations, and estate-planning objectives.
For more information on Tucson Estate Planning Attorneys or if you would like an Arizona Living Trust or know more about Medical Powers of Attorney, call Fishbein Law Group at (520) 535-1000 for a courtesy conversation.
Disclaimer: This article is intended for general informational and entertainment purposes only and should not be considered professional advice. Always consult a qualified professional regarding your specific needs or circumstances.
