Beneficiary designations are very popular in financial and estate planning. Through the use of beneficiary designations, you can transfer many assets after your death without any probate court involvement. Sounds wonderful, right? Although the process seems pretty straightforward, problems may arise, and mistakes can be made. In fact, beneficiary designations can wreck your estate plan, even if they are completed correctly.
I'll give you an example. An elderly client of mine told her banker that she wanted her two sisters and two nephews to inherit her bank accounts upon her death. My client completed the bank's beneficiary designation paperwork, stating that each of her four beneficiaries would receive 25% of the money in each account. What could go wrong? Well, things did not go as smoothly as my client had intended. One of my client's sisters passed away just days before my client. The bank made the other three beneficiaries probate the deceased sister's one-quarter share of the accounts, so an estate had to be opened. The surviving sister and nephews ultimately received the deceased sister's share, but not until much time and expense went into administering my client's estate at probate court.
Many clients, and some financial advisors and attorneys, too, do not have a complete understanding of how beneficiary designations work. Many people do not realize that beneficiary designations trump a person's Will and Trust. That means that your designation forms will dictate who receives those designated assets, regardless of what your Will or Trust says.
Do your beneficiary designations gel with your overall estate plan? For example, you may want your children to inherit your assets. If a child dies before you, you may want that child's children (your grandchildren) to inherit the share of your deceased child. You may want to complete beneficiary designations to accomplish your goal, but do you know how to complete beneficiary designation forms to plan for that contingency? Do your financial institutions permit you to add such language to your designations? If the designation forms are not properly completed, your deceased child's share may go to his/her siblings, not your grandchildren. Or, your deceased child's share may have to be probated.
Another common problem with beneficiary designations is that people forget to update their designations when a beneficiary passes away. If a named beneficiary predeceases the owner, and a contingent beneficiary is not named, the asset will be included in the owner's probate estate.
What if the named beneficiary is not dead, but she cannot be identified or located? What if the named beneficiary is a minor child or an individual with special needs? What if the owner did not obtain the required spousal consent for his retirement plan?
As you can see, many problems and issues can and do arise with beneficiary designations. They are not as foolproof as many people think. The best way to accomplish your estate planning goals and plan for every possible contingency is through a properly drafted and funded Living Trust. At a minimum, you should work with your estate planning attorney and financial planner to ensure that your estate planning goals are accomplished through your estate planning documents, asset titling, and beneficiary designations.