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Family Office & High Net Worth Families Blog

Make Sure Your Beneficiary Designations Reflect Your Wishes

Beneficiary designations determine who will receive your assets, such as retirement plans, life insurance policies, and, potentially, bank and brokerage accounts when you die. Even if you’ve made an estate plan that includes a will or trust, you need to regularly update beneficiary designations because these assets typically don’t go through the probate process. Plan to review designations once a year or whenever you experience a major life change, such as a birth, death, marriage, or divorce.

Recognize Serious Risks

Often, people designate a beneficiary when they open or acquire a non-probate asset — such as a 401(k) account when starting a new job — and then forget about it. But over time, your beneficiary designations may become inappropriate or obsolete as a result of changes in life circumstances, estate planning goals, or tax laws.

Having outdated, inaccurate, or incomplete beneficiary designations comes with high risk. For example, failure to update designations could mean that you inadvertently leave assets to someone you didn’t intend to benefit from, such as an ex-spouse.

Or, say you fail to name a contingent beneficiary for an asset. If your primary beneficiary dies before you — and you don’t designate another beneficiary before you die — the asset will end up in your general estate and may not be distributed as you intended. In addition, certain assets, including retirement accounts, offer some protection against your creditors, which would be lost if they’re transferred to your estate.

The situation can become even more complicated if a contingent beneficiary is a minor and the primary beneficiary dies before you. For instance, a wife might name her husband as the primary beneficiary of a life insurance policy and her minor child as a contingent beneficiary. But if her husband dies while the child is still a minor, it could lead to legal entanglements. So the wife in this case should name a new primary beneficiary as soon as possible.

Government Benefits and Tax Consequences

Here’s something else to consider: If a loved one depends on Medicaid or other government benefits (for example, a disabled child), naming that person as the primary beneficiary of a retirement account or other asset may render him or her ineligible for those benefits. A better approach may be to establish a special needs trust for your loved one and name the trust as a beneficiary.

Also, changing tax laws may easily derail your estate plan if you fail to update your plan accordingly. For instance, the SECURE Act sounded the death knell for the “stretch” IRA. Previously, when you left an IRA to a child or other beneficiary (either outright or in a specially designed trust), distributions could be stretched out over the beneficiary’s life expectancy, maximizing tax-deferred savings. Now, most non-spousal beneficiaries of IRAs must distribute the funds within 10 years after the owner’s death.

In light of this reality, review the designated beneficiaries for your IRAs and other retirement accounts, evaluate the impact of the SECURE Act on these beneficiaries, and weigh your options. For example, you might consider naming different individual beneficiaries or leaving IRAs to a charitable remainder trust or another vehicle that provides some of the benefits of a stretch IRA.

Don’t Set and Forget

Designating a beneficiary isn’t a “set it and forget it” activity. Keep designations up-to-date or your wishes for the disposition of your wealth may not be carried out. Talk to an estate planning professional about how non-probate assets fit into your larger estate plan and what you need to do to make your intentions clear. Give us a call if you have any questions.