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Beneficiary Designations: A Wonderfully Simple Estate Planning Technique That Can Go Terribly Wrong!

If you are like most people, a large part of your wealth consists of “non-probate” assets: assets not controlled by a written Will, but instead controlled by a “Beneficiary Designation” or “Pay on Death” directive which directs who will receive that asset at your death. Common examples of non-probate assets include life insurance policies, annuities, 401(k) plans, and Individual Retirement Accounts (IRA’s).

When purchasing these types of assets (or starting a new job where you receive a retirement or life insurance policy as a benefit), you will be given an opportunity to name the person(s) who will receive the money at your death. This is a wonderful (and wonderfully simple) way of ensuring that your assets go to your intended beneficiaries at your death, without having to go through a formal probate/estate administration proceeding. Beneficiary Designations can be revoked or amended at any time, as many times as you like. The bad news is that the Beneficiary Designation is basically “set in stone,” meaning that no matter what your Will says, the money goes to the person named as beneficiary.

Why does this matter? Consider the angst and frustration of Donna, whose husband, Ralph, just died owning a life insurance policy with a death benefit of $1 million. Ralph was previously married to Monica, but they divorced in 2015. Ralph had been advised that the divorce would revoke any provisions in his will in favor of Monica, and he felt good about that (even though he had torn up that old will just to be on the safe side). When he married Donna, he made sure to have a new will prepared leaving his entire estate to Donna. What Ralph didn’t do was change his Beneficiary Designation on his life insurance policy after his divorce from Monica. Imagine Monica’s surprise when when she submitted a claim for the policy proceeds and was told she was not entitled to them. How can this be? Unlike the provisions made for a spouse in a written Will, which are automatically revoked by state law upon divorce, Beneficiary Designations are governed by your contract with the company, and by law, the company must pay the funds out to the current beneficiary on file. So the harsh outcome for Donna, who desperately needed the money to keep paying bills, making house payments, etc., was that the insurance company was required to pay the money to Ralph’s ex-spouse.

Not divorced and not planning on it? Great. Your Beneficiary Designations probably designate your spouse as your primary beneficiary and your children as contingent beneficiaries should your spouse predecease you. You may have already had a Will prepared naming a trustee and providing for a trust for your children in case your death occurs while they are still very young. However, if your Beneficiary Designations simply named your children as beneficiaries, without naming the trust set up for them under your will, the children will receive the money, not the trust. If any child is under age 18, the court may have to appoint a guardian to hold those funds until the child reaches age 18. Just imagine putting $1 million dollars into the hands of an 18-year-old (or even some 30-year-olds!).

What if I just name my “estate” as beneficiary of my life insurance policy? That way, the money will definitely pay to the people named in my Will. It may……or it may not. If you die with a significant amount of debt, those creditors are entitled to seek payment from your estate (including that life insurance money). However, that same money, paid directly to the person named as beneficiary on the Beneficiary Designation, will pass to them free of the claims of your creditors.

Good estate planning should never overlook attention to Beneficiary Designations. It only takes a few minutes to check the beneficiary and make any changes with a simple form, oftentimes online, so the change is processed immediately. As with your Will, you should also review these items from time to time to ensure they are still accurate and reflective of your wishes.

Author: Amy Isaacs, Estate Administration/Probate Attorney

The McIntosh Law Firm, P.C.