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Understanding Beneficiary Designations in Estate Planning
By: Abigail Sutton
An essential aspect of estate planning is determining how your assets will be distributed after you pass away. Many people believe their will controls all aspects of their estate, but this is not entirely the case. Beneficiary designations play a crucial role in ensuring your assets are passed on according to your wishes and understanding the difference between what a will controls and what it does not is vital to effective planning.
The Role of Beneficiary Designations
Certain types of accounts or assets, such as life insurance policies, retirement accounts (like IRAs or 401(k)s), and payable-on-death (POD) or transfer-on-death (TOD) bank accounts allow you to designate beneficiaries. Most custodians, banks, and insurance companies provide their own forms for the account owners. These designations specify who will inherit these assets upon your death and will take precedence over the instructions in your will.
Why is this important? If you do not update your beneficiary designations — or if they conflict with your will — your assets may not be distributed according to your intentions. For example, if your will states that your daughter is to receive your retirement account, but your beneficiary designation lists your ex-spouse, the account will go to your ex-spouse, regardless of what your will says.
Additionally, beneficiary designations ensure that assets are transferred directly to the individuals or entities named as beneficiaries, bypassing the probate process, which can save time and money. If you have tailored your estate plan to avoid probate, carefully reviewing your beneficiary designations is necessary to ensure you name the appropriate beneficiaries.
What Does a Will Control?
A will generally governs the distribution of your estate, including tangible personal property (e.x., jewelry, heirlooms, and household furniture), real estate, and any assets that do not have a designated beneficiary. This “catch-all” document directs how your estate will be divided among your beneficiaries.
It is important to note that if you do not name a beneficiary on an account or asset that allows such designations, the default is that the account will be payable to your estate at your death and, therefore, be controlled by the instructions laid out in your will.
Why Beneficiary Designations Matter
While your will is a critical component of your estate plan, it does not control everything, and it is important to align your beneficiary designations to fit the overall goal of your estate plan to ensure that your estate is distributed exactly as you intend. We recommend that you regularly review your beneficiary designations alongside your will and other estate planning documents to ensure they are consistent, especially after significant life events like marriage, divorce, or the birth of a child.
If you are unsure about your current designations or need assistance reviewing them, contact Abby Sutton or another member of our estate planning team to ensure your estate plan and beneficiary designations represent your current wishes
