Beneficiary designations for your financial assets are helpful in that assets can be transferred quickly to your heirs without waiting for probate of the Estate (and assuming you do not have a Trust). Although this can be a good option, don’t overuse it or use it blindly. Consider these risks before assuming your assets are protected:
- First, you may forget to update your beneficiary designations as things change in your life. For example, if a beneficiary predeceases you or their life changes, changes may need to be made to get your asset to the right person or in the right manner.
- Depending on how many accounts or types of assets you own, it can be a daunting task with multiple assets to contact and ensure the beneficiary designations are properly changed and received by each institution. With a Trust formed and established as the owner or beneficiary, you can simply amend your Trust, which contains the beneficiaries, rather than amending each beneficiary designation.
- Next, you need to take into account special or specific circumstances. Assets are paid outright to named beneficiaries immediately so this may not be beneficial to a beneficiary who may be battling creditors or desire asset protection. You would not want to name a minor child or a special needs person as a designated beneficiary because they would generally not be able to claim the asset unless a costly Guardianship is in place. In these scenarios, a Trust for their benefit is a better alternative.
- Also, if your designated beneficiary dies, then the asset could pass to your probate Estate, their probate estate, or worse, go to someone whom you did not want to receive the benefit. You have to read and understand the fine print by the institution for the default provisions or customize your designations, which makes a Trust (or even a Will) an attractive alternative when compared to customizing designations.
- You can name contingent beneficiaries for when your primary beneficiaries predecease but what if they also predecease? See #4 above again. Or what if you want to customize the distribution to the contingent beneficiary but not the primary beneficiary? Again, see #4 above.
- Unfortunately, there is also the possibility of misspelling or getting a name wrong. People within a family could have similar names and therefore the designation would need to be very specific. Often people change their name due to marriage or divorce and when names don’t match exactly there may be delays in distributions or possible litigation to determine the intended heir.
- Know that beneficiary designations generally control and override the terms of your Will or Trust. Make sure your Will or Trust matches your designations at your financial institutions or you may have some ill feelings among family members when their expectations aren’t met, or worse, beneficiaries litigate. In these situations, document your intentions.
- Finally, it’s difficult if not impossible to customize the distributions to your loved ones. For example, you cannot leave percentages with different contingencies or leave distributions with control that the assets are not immediately spent.
Having beneficiary designations are not a bad thing. They are a very useful tool sometimes. They help with smaller estates or situations where the above considerations are not important. Beneficiary designations can also be valuable for avoiding a decedent’s creditors. However, they shouldn’t be the sole way of protecting your assets. Estate planning with a Will back-up or support and advance directives are critical. Mistakes can be costly so get your estate plan in order and at least consider other options such as a Trust as your core planning vehicle. I always say “beneficiary designations are great and work when they work, but when they don’t, it’s costly.”