Prior to her passing, Jade conscientiously ensured beneficiaries were named on her financial accounts, intending for her entire estate to be equally divided between her two sons, Samuel and Benjamin. However, instead of designating them as joint beneficiaries on her brokerage and bank accounts, she named Samuel as the sole beneficiary on her brokerage account and Benjamin as the sole beneficiary on her savings account. Upon Jade’s death, nearly all her assets bypassed the will and were distributed according to her beneficiary designations (as-is intended with beneficiary designations). However, Samuel received a significantly larger portion than his brother, resulting in an unequal asset split between Jade’s children, and a result that was not in line with Jade’s wishes.
Unfortunately, such scenarios are common. Naming and periodically reviewing beneficiary designations is a critical component of estate planning, yet it is frequently neglected or forgotten. Since beneficiary designations are binding and supersede all other estate planning documents (including a will or a trust), meticulous attention to these designations over time is important. In Jade’s situation, her objective was to divide assets evenly between her two sons. Yet, the way she designated beneficiaries caused one son to inherit substantially more than the other.
Choosing Beneficiaries
Like Jade, many individuals designate their spouse or children as beneficiaries. Other common choices include trusts and charitable organizations. Any individual, trust, or charitable organization (or a combination thereof) can be named beneficiaries, provided the total allocations sum up to 100%.
Generally, it is prudent to also name a contingent beneficiary should the primary beneficiary predecease or pass away simultaneously with the account owner. Similarly, it is typically inadvisable to name someone from an older generation as a beneficiary. For unmarried individuals and/or those without children, common choices include parents as primary beneficiaries and siblings or nieces and nephews as contingent beneficiaries. Charities or trusts are also more common in these cases.
Individuals considering naming minor children as beneficiaries, whether primary or contingent, should seek advice from an estate planning attorney. One option is to establish a trust and designate that trust as the beneficiary, rather than naming minor children directly. If deciding that a minor will inherit assets outright, additional considerations must be made. Firstly, a guardian must be appointed to oversee those assets until the child reaches the age of majority (typically 18 or 21, depending on the state of residence). Secondly, while a person’s will often names a guardian for any minor children, the guardian still needs to be officially appointed by a judge. If no guardian is named in the will, the judge will appoint a suitable candidate. Lastly, if a beneficiary has special needs (such as a disability), inheriting assets directly could affect eligibility for government-provided benefits.
The Benefits of Naming and Reviewing Beneficiaries on a Regular Basis
Designating a beneficiary or beneficiaries ensures that heirs will receive assets promptly and as intended by the decedent. If beneficiary designations are absent, the assets must undergo probate—a court procedure by which a will is validated, and an estate is administered. Although probate aims to distribute estates fairly, it can be a lengthy and expensive process.
Depending on the estate’s content and size, finalizing the proceedings may take months or even years. Additionally, probate is a public matter, rendering assets subject to claims by the decedent’s creditors. Designating beneficiaries on retirement or non-retirement accounts allows assets to bypass probate and transfer directly to named individuals or entities upon the account owner’s passing.
For retirement accounts (e.g., a 401(k) or IRA), beneficiary designations are typically assigned when the account is opened. Non-retirement accounts can also have beneficiaries assigned; however, this usually occurs post-establishment via a separate form. For such accounts, the designation of a beneficiary is referred to as a “Transfer on Death” (TOD) feature, and for bank accounts, it is termed “Payable on Death” (POD). Regardless of account type, there are no costs involved with naming beneficiaries.
The average American household manages approximately 15 different financial accounts, making it challenging to keep track of each. Thus, proactively reviewing beneficiary designations regularly is imperative, especially since they are generally not reflected on portfolio or account statements. For instance, an audit should commence when establishing or updating a will or trust, or when significant life events occur, such as marriage, the birth of a child, divorce, or the death of a named beneficiary. A change in retirement plan provider should also prompt action, as beneficiary information usually does not transfer from one provider to another.
In the aforementioned scenario, Jade might have assumed assigning each son to an account would result in an eventual 50/50 split. Yet, periodically auditing her overall beneficiary plan would have been more effective, revealing discrepancies between her intentions and the actual designations.
The Consequences of Outdated or Missing Beneficiary Information
Outdated or missing beneficiary designations can cause an estate plan to falter, leading to assets being allocated to unintended recipients or in an unintended split. For example, if a former spouse remains a beneficiary on an account, that designation supersedes the current will’s provisions, thereby depriving current spouse or children of potential inheritance. Likewise, failing to add children at birth—or, as in Jade’s case, not including all children as equal beneficiaries—can exclude them from estate distributions.
If no beneficiaries are named, assets will be subjected to probate and consolidated into the decedent’s estate at death, rather than passing directly to beneficiaries. The estate’s assets will first address any associated debts before distributing remaining assets to beneficiaries. This probate process delays asset transfer to beneficiaries, including access to funds needed to settle the estate’s debts, taxes, and final expenses, and ultimately reduces the estate’s net value.
Should an account owner die without a beneficiary designation and without a will (this is called dying “intestate”), the court determines the estate’s heirs per state intestacy laws. These complex rules vary by state, and any court involvement inherently delays asset transfer to beneficiaries.
Conclusion
Maintaining current beneficiary designations is vital for long-term financial and estate planning. A coherent plan ensures assets are passed to intended beneficiaries and prevents outdated or missing information from undermining estate planning objectives. Additionally, it simplifies legal processes for beneficiaries, ensuring assets are promptly and accurately distributed according to the decedent's wishes.
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