Beneficiary designations allow certain assets to bypass an individual’s will or trust and, instead, transfer the assets directly to loved ones. IRAs, certain employer sponsored retirement accounts, life insurance policies, and some bank and brokerage accounts are all good examples of these non-probate assets. You have to be careful with your beneficiary designations, or else your assets may not be distributed in the ways you originally intended. If you aren’t careful with your beneficiary designations, there is risk of unnecessary conflict and hardship among surviving family members if you intentions are undermined.

Three Steps

Here are three steps to help ensure your beneficiary designations align with your estate planning goals:

1. Name A Primary Beneficiary & A Contingent Beneficiary. Without a contingent beneficiary for an asset, if the primary beneficiary dies before you — and you don’t designate another beneficiary before you die — the asset will end up in your general estate and may not be distributed as you intended. In addition, certain assets are protected from your creditors, which wouldn’t apply if they were transferred to your estate. To help ensure that you control the ultimate disposition of your wealth and protect that wealth from creditors, name both primary and contingent beneficiaries and don’t name your estate as a beneficiary.

2. Reconsider Beneficiaries To Reflect Changing Circumstances. Designating a beneficiary isn’t a “set it and forget it” activity. Failure to update beneficiary designations to reflect changing circumstances creates a risk that you’ll inadvertently leave assets to someone you didn’t intend to benefit, such as an ex-spouse.

It’s also important to update your designation if the primary beneficiary dies, especially if there’s no contingent beneficiary or if the contingent beneficiary is a minor. Suppose, for example, you name your spouse as the primary beneficiary of a life insurance policy and name your minor child as the contingent beneficiary. If your spouse dies while your child is still a minor, it may be advisable to name a new primary beneficiary — such as a trust — to avoid the complications associated with leaving assets to a minor (court-appointed guardianship, etc.). Note that there are many nuances to consider when deciding to name a trust as a beneficiary.

3. Take Government Benefits Into Account. If a loved one depends on Medicaid or other government benefits — for example, a disabled child — naming that person as primary beneficiary of a retirement account or other asset may render them ineligible for those benefits. A better approach may be to establish a special needs trust for your loved one and name the trust as beneficiary.

Avoiding Unintentional Outcomes

Not paying proper attention to beneficiary designations can also expose your estate to costly delays and legal disputes. If a listed beneficiary is no longer living, or if a designation is vague or incomplete, an asset may have to go through probate, which defeats the purpose of naming beneficiaries in the first place.

This can increase expenses, delay distributions, and create stress for your family during an already difficult time. Carefully making beneficiary designations and regularly reviewing and updating them helps ensure your asset distributions align with your current wishes, helps prevent disputes, and helps protect your family from unintended financial complications. Contact us with questions regarding your estate plan.