Updated: Jul 12, 2022
Some Do’s and Don’ts For Beneficiary Forms
It takes a good deal of time and effort to prepare thorough wills and trusts. At the same time, many of us approach beneficiary designations with barely a thought. Our choices are often made in a blur of other paperwork or all too quickly when filling out paperwork for a new job. And because what we put on the beneficiary designations aren’t something that appears on monthly statements, we may not revisit them for years. Meanwhile, a lot in our lives may have changed since we made those original choices–marriages and divorces, births and deaths, relationships improved or turned sour. Alternatively, many of us make those designations without considering the financial, tax, and other ramifications –f or our own plans as well as those of our loved ones.
What many people don’t realize is that those designations are binding and, in most cases, will supersede whatever is laid out in will or trust documents. If you didn’t give your beneficiary designations much thought when you first made them – or you made them years ago and a lot has changed since – it’s time to revisit them. We can help you navigate the process, but read more below first to give yourself a solid starting point - we'll be ready to help once you've collected all your information.
Do: Understand what “counts” as a beneficiary designation. You may naturally think this applies only to forms for life insurance, annuities or retirement accounts. That’s all true but putting your child’s name on your bank account or deed is another form of beneficiary designation. A joint account holder will often receive that asset upon your death even if you made the account joint for other reasons.
Do: Understand what happens without a beneficiary designation. If you don’t make any beneficiary designations, the assets in the account will be paid to your estate. If you have a will, the asset will be distributed in accordance with the provisions in your will. If you have no will, then the state has a will for you, called the law of intestate succession, and will pass accordingly. The state’s will is usually NOT what you want, and it will take more time and more money to distribute your assets. Don’t dismiss the importance of making your beneficiary designations.
Do: Make sure your beneficiary designations fit with other parts of your estate plan. In my experience, most people view the estate plan in their wills as their one and only estate plan. It’s common for people to make beneficiary designations first and draft wills later when their families have grown. The former may contradict the latter, but the beneficiary designations will generally “trump” what’s in the will, regardless of which paperwork was completed first. A good estate-planning attorney will typically cover beneficiary designations when setting up your plan and will send you on your way with a packet of instructions about how to update your beneficiary designations to match the rest of your plan.
Do: Name contingent or partial beneficiaries. In addition to naming a primary beneficiary, most beneficiary forms give you the opportunity to name a contingent beneficiary, that is, a backup beneficiary. So, you could make your spouse your primary beneficiary, for example, and your brother the secondary beneficiary in case something happened to you and your spouse at the same time. You might also divide a given asset among multiple beneficiaries. For example, you could designate both your brother and sister as 50% primary beneficiaries of your 401(k) plan and name your favorite nephew and niece as 50% contingent beneficiaries each. Don’t let yourself be limited by the number of lines on the form. Call your provider if you can’t make your designations fit and ask for written confirmation of your choices.
Do: Recognize the benefits accorded to spousal beneficiaries. Most of us naturally want our spouses to inherit any assets we hold in our own names. But that might not be true for many situations, such as a second marriage when each of you has children to a prior relationship, if your spouse has a lot of his or her own assets or you’re worried about another family member’s financial well-being. Bear in mind that spouses who inherit certain assets get special treatment in the tax code. That, in turn, often makes it advantageous for the spouse to inherit such assets ahead of other individuals.
When it comes to inherited IRAs and 401(k)s, for example, only spouses can roll over those assets into their own IRA accounts and can continue deferring taxes for their lifetimes. Because rolling those assets into their own accounts will enable the surviving spouse to take greater advantage of the tax benefits accorded those assets, it often makes sense to name a spouse as a beneficiary on them. If you have a life situation that you’d like to have some or all of your assets paid to someone other than your spouse, an experienced estate planning attorney can help you establish a plan to benefit your spouse and address those other situations.
Do: Make beneficiary designation checkups part of your account review. You’ve surely heard the horror stories about the guy who inadvertently left his 401(k) to his ex-wife because he had failed to name his new spouse as his beneficiary, or mistakenly left his youngest with no assets because he hadn’t updated IRA beneficiary designations after the birth of the child. Our life situations change, and so should our beneficiary designations, so be sure to revisit yours periodically. Beneficiary designations can also fall through the cracks when you change financial providers–for example, if you roll over your IRA assets from one firm to another. This can also happen with employer-provided plans: If your employer or if your company has switched 401(k) providers, check to make sure your beneficiary designations have ported over along with your contribution rate and other choices you’ve made.
Don’t: Leave assets to minor children without understanding what that means. Just as many married people want their spouses to inherit their assets, many parents naturally want their children to do so. Bear in mind, however, that minor children can’t inherit assets outright. If you designate a child under age 18, it may be necessary to have a court proceeding to appoint a custodian of the asset left for the child. That custodian is unlikely to be the child’s parent. If you’d like to make a child the beneficiary of a financial account like an IRA or 401(k), a better idea is to make the child the beneficiary, then specify in your will the name of a custodian to manage the child’s financial affairs until he or she reaches a specific age. (The custodian can be the same person as the child’s guardian, or it can be someone else.) Alternatively, you could make a trust the beneficiary of your IRA; your trust documents, in turn, can spell out how that money is to be managed and distributed to your heirs.
Don’t: Leave assets to loved ones with special needs without considering the ramifications. If you have a special needs loved one in your life, you probably feel a pull to make sure they have everything they need and then some. Bear in mind, however, that there could be complications if a loved one with special needs inherits assets from you. You could affect a disabled individual’s eligibility for government-provided benefits by transferring assets directly to him or her. In addition, if the person has an intellectual disability, he or she may not be able to manage the assets. If you’re able to transfer a large amount of assets to a loved one with special needs, consult with an attorney who specializes in estate planning first. He or she may recommend that you set up a special needs trust.
Don’t: Designate to someone who’s not the end owner. Sometimes I see someone who wants to name a family member as the sole beneficiary, with the assumption that he or she would know how the owner wants the money divided. This is a bad idea. Not only will your designee not necessarily remember what she was supposed to do with the money, but she would not be legally required to split the assets equally among our siblings. That happened when a sister named her sister as the designed. The client had an adult disabled daughter and presumably thought her sister would take care of her daughter. It didn’t happen. Sister decided to keep the money. We had to fight to get some of that money back for the client’s daughter. Bottom line: Be as specific as possible on beneficiary designations. Don’t rely on someone else to know what you want and to make it happen.
Consult with an experienced estate planning attorney to get well-rounded and fulsome advice about how to make your beneficiary designations. Your family is counting on you!