Legacy Assurance Plan: Death Beneficiary Designations

Summary: Placing death beneficiary designations on assets where the law allows you to do so can be an easy and inexpensive way to engage in estate planning and avoid probate on those assets. It can also create substantial problems for you and your loved ones if not carried out properly and not maintained properly. That’s because there are many different ways that beneficiary designations can go wrong and thwart your true estate planning intentions, resulting in your leaving behind a legacy that is far different than what you intended.

If you have engaged in estate planning or considered it, then you may already be familiar generally with beneficiary designations. Whether it’s your life insurance policy or a pay-on-death designation on a bank account or a transfer-on-death deed on a piece of real property, today there are lots of varieties of assets with beneficiary designations (or the potential to add beneficiary designations to them.)

If avoiding probate is one of your central estate planning goals, then obviously one of the clearest ways that an asset with a beneficiary designation can go awry and fail to meet your objectives is if there is not valid beneficiary available to receive the proceeds of the account when you die. One way this can happen is if your beneficiary dies before you do. If your beneficiary predeceases you and you didn’t list an alternate beneficiary, then the proceeds of that asset will go into your probate estate and have to go through probate administration to be distributed.

You may have already considered this possibility and planned to avoid it through the inclusion of alternate beneficiaries. But death is only one of many ways that a beneficiary designation can go off course. Another life event that can create havoc is divorce and/or remarriage. With some assets, if you list your spouse as your beneficiary, then later divorce him/her and remarry someone else, the proceeds of that asset still go to your ex if you fail to update your beneficiary designation paperwork properly.

In some states, though, divorce automatically invalidates all beneficiary designations made to your now former spouse. For some folks, that could be a hindrance, not a help. Let’s say that you’ve decided that, even though you’ve divorced, you still want your former spouse to be the beneficiary on one (or more) of your accounts. If you made those designations while you two were married, those designations may be invalid now and you may need to go back and complete new beneficiary designation paperwork to establish that your former spouse is to be the beneficiary.

Many people may recognize a beneficiary’s death as a call to update their beneficiary paperwork. What may not occur to you, though, is the need to act if your beneficiary becomes disabled. If your beneficiary is now getting SSI or other need-based benefits, you’ll need to re-work your beneficiary designation. If you don’t, your death could trigger an outright distribution of the proceeds of that account to your disabled beneficiary, which would, in turn, potentially cause your beneficiary to become disqualified for SSI (or other benefits.) To keep this asset flowing to the same beneficiary without possibly risking your beneficiary’s eligibility for benefits, a special needs trust will need to be created on his/her behalf, and the trust would then be named as the new beneficiary. Alternately, you could replace this person with someone else as the beneficiary. Either way, you’ll need to update your paperwork.

The world of business is always moving and changing, and these changes can affect your beneficiary designation. For example, if you’ve changed jobs and you’ve rolled over your retirement from your old employer’s plan to your new employer’s plan (or into an IRA,) then that wipes out your old beneficiary designations. You’ll need to create new ones for the new account.

On the other hand, maybe you’re not the one who has experienced a change, but your financial institution has. If the institution with which you had a pay-on-death or transfer-on-death asset (or assets) gets sold or merges with another entity, you may want to check on your accounts and your beneficiary designations to make sure that your designations remain in effect with the new institution.

This is just a short list of some ways that an asset with a beneficiary designation can go off-course and fail to accomplish what you intended. There are multiple ways to avoid this scenario, though. For some of your assets, you may want to consider structuring them differently. Perhaps, instead of using death beneficiary designations, you may decide that funding those assets into a revocable living trust may be preferable. Regardless of whether you restructure this wealth into other estate planning tools or not, the key to the health of any estate plan is routine plan reviews. A detailed, periodic review can help you identify any and all changes that have taken place and allow you to take the action you need to ensure the well-being of your plan and the integrity of your goals. This is especially true if you plan has multiple assets with beneficiary designations.

This article is published by the Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services-company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at www.legacyassuranceplan.com.