Beneficiary Designations: the most overlooked part of estate planning
You’ve done the emotional work of wrestling with the fact of mortality (!), considering the needs of your loved ones, and learning more than you ever wanted to know about taxes and probate and trusts and what-have-you. You’ve signed documents and celebrated with a trip to Trader Joe’s or a champagne toast, depending on your style. You put your binder up high on a dusty shelf, share digital copies of documents with your loved ones, and then devote all of your spare brain cells to something infinitely more fun than talking about death. You feel great about having crosses this Big Scary Thing or this Big Annoying Thing off your to-do list.
That’s all well and good, but did you actually finish the process? Did you square your shoulders and face off against your…beneficiary designations (dun dun dunnnnnnn)?!
Almost every plan I create with a family involves reviewing and updating beneficiary designations - those contracts with financial institutions and insurance companies that determine what happens to your retirement accounts, your non-retirement investment assets, your life insurance policies, and even your cars and bank accounts. While some of these have different formats (bank accounts have Pay on Death designations; non-retirement investment accounts often have Transfer on Death designations, etc.) for these purposes, we can consider them under the category of beneficiary designations because they function very similarly. These are the 5 scenarios that show why paying close attention them is so so important:
General Alignment of Assets. Beneficiary designations often cover the majority of financial assets (aside from real property). That means that if these aren’t aligned with your will/trust/wishes, big chunks of your assets will be bypassing the plan you worked hard to create.
Charitable gifts. Charitable giving is often best achieved from assets that carry income taxation with them, and for many folks, those are traditional IRAs/401ks, etc. If you have charitable intentions, these are often good assets to consider for this purpose…but this excellent tax-planning is dependent on updating the paperwork.
Gifts at the death of first spouse. Even for married folks who choose to use a will-based plan, we are often able to avoid a significant probate at the death of the first spouse. However, what if you want to give a gift to your sister or your friend or your grandchild upon your death, even if your spouse survives you? If you include it in your will, there may not actually be any probate assets to satisfy that gift. While not the only path forward, using a beneficiary designation to effectuate that gift is a great option.
Minor children. Minor children can’t inherit directly, so many families will use trusts or custodial accounts under the Uniform Transfers to Minors Act (UTMA) to make management of assets for minor children easier. If they are listed as individuals on beneficiary designation forms for assets (life insurance and retirement accounts, especially!), those assets won’t have the benefit of the provisions of the trust.
Tax planning at the family level. In many families, hard working adult children may have vastly different incomes. In that case, it makes sense to consider leaving more of an asset that carries income tax liability (especially traditional retirement accounts) to a child in a lower tax bracket, and then balancing that elsewhere for other children if desired. Effectuating this plan requires updating those beneficiary designations.
We recognize that updating these can be tedious. In addition to providing language for these forms and encouragement along the way, Heather Borer, our legal assistant, is available to review forms and go to the mattresses with financial institutions if you’re having trouble getting the right paperwork or instructions. Email her at admin@marylandlegacylaw.com to ask for help wrapping up this process.
