When working with our clients, we find that many are surprised at the importance of properly completing beneficiary designations, and most have given very little thought to them. Beneficiary designations are used to direct who is entitled to receive the proceeds from life insurance, retirement plans and pay-on-death accounts, many of which can be worth a substantial amount of money. In fact, these assets may be the largest part of your estate.
Beneficiary designation forms are as important to the effectiveness of your estate plan as your will or a trust. These types of assets pass by contract to the named beneficiary (or the individual specified in the plan documents if no beneficiary is named) and do NOT pass in accordance with your will or trust. An improperly completed beneficiary designation or missing beneficiary designation could cost your family a substantial amount in taxes or even probate costs if not done properly, and can result in the proceeds payable to someone other than the desired beneficiary.
As many people are in transition right now, whether they are working from home, furloughed, have been laid off or are pivoting to a new career, it is a critical time to review beneficiary designations and make sure that any new beneficiary forms are completed correctly. To help you with that process, the following are a few “dos” and “don’ts.”
We will start with the “dos”:
DO specify a beneficiary. It is important to know that estates, charities and organizations are treated differently than individuals, and extra care should be taken when naming a beneficiary other than an individual. If you intend to name an individual as a beneficiary, we typically want this individual to be a “designated beneficiary.”
DO specify one or more contingent beneficiaries. And remember, if you specify more than one beneficiary, the designation needs to be clear about what happens if one or more of those beneficiaries predecease you.
DO update beneficiary designations whenever there is a “life change” or “plan change” such as a marriage, divorce, or new child, or a plan conversion (like a ROTH conversion) or a job change.
DO obtain your spouse’s consent if you are married and naming someone other than your spouse as a beneficiary.
DO get the plan administrator to confirm that they have received and accepted the beneficiary form (and put that confirmation with your other estate planning documents so that they will be available to your executor or trustee).
DO seek the help of a qualified estate planning attorney. Your financial advisor will play a critical role in the process as well, but is not able to advise you how to complete a beneficiary designation. This task is just too important to do on your own.
Now for the “don’ts”:
DON’T leave money to minors or incapacitated individuals outright. This includes naming your minor children as beneficiaries on life insurance or your retirement plans. They will not be able to obtain the funds until a guardian is appointed by the court, and after appointment the guardian will be required to account annually to the court. There are other ways that estate planners often address this, often with trusts or custodial designations, and as an integrated part of your estate plan.
DON’T leave the assets to trust without consulting with a qualified estate planning attorney. While there are a lot of reasons that leaving assets to a trust can be desirable, it requires very specific planning and language within the trust document.
DON’T require the plan administrator to make legal judgments or act in a capacity that is more appropriate for your executor or trustee. If you use a formula for determining the amount to be received by beneficiaries, it should not be dependent on external facts (i.e., percentages to certain beneficiaries is okay, “minimum amount necessary to eliminate federal estate taxes” is not).
DON’T put off completing your beneficiary designation. It may seem like a daunting or inconvenient task, but it is infinitely better to complete the forms, then leave it for your family to sort out later.
Beneficiary designations are an important legal document, and each family and retirement plan is going to be different. The recommendations above are general guidelines, but do not constitute legal advice, nor are they a substitute for a customized recommendation from a qualified estate planning attorney. If you have questions, we would be happy to schedule a consultation. You can start by contacting us here.