Beneficiary Designations: The Other Half of Your Estate Plan

In a recent post, we explored when it might be a good idea to review your estate plan. A large factor controlling where your assets go after your death—and one which is, unfortunately, often overlooked—is whether your assets have a designated beneficiary.

Beneficiary designations are an oft-forgotten pillar of estate planning that, in many cases, control a greater amount of assets than a Last Will & Testament does. In this entry, we will give an overview of beneficiary designations, explain their importance in the estate planning process, and give some practical advice on reviewing and amending them.

What are Beneficiary Designations?

Beneficiary designations are instructions given to a bank, insurance company, or other institution which tell that institution who should receive your assets or some other benefit when certain circumstances are met (typically, at your death). Common examples of products, accounts, or policies which may allow for beneficiary designations include:

• Checking and savings accounts;
• Retirement accounts (IRAs, 401Ks, etc.);
• Life insurance policies;
• Annuities;
• Certified deposits (CDs);
• Stocks; and
• Digital assets.

Beneficiary designations may also be referred to as pay-on-death (POD) or transfer-on-death (TOD), depending on the type of account and each institution’s preference (these are not technically the same, but function the same as a beneficiary designation). When appropriate, real property may have a “beneficiary designation” of sorts by way of instruments such as enhanced life estate deeds.

Why Beneficiary Designations are Critical

A careful review of beneficiary designations is critical to planning your estate, even if you already have a Last Will & Testament or trust. In fact, it might be more important for those with estate plans to review their beneficiary designations, to ensure that those designations do not conflict with the general scheme of their estate plan.

Beneficiary designations are essentially a private agreement between you and the institution holding your account or policy. By designating a beneficiary to receive the asset upon your death, you have made the recipient a third-party beneficiary of that contract between you and the institution. Those assets will therefore pass directly to the beneficiary upon your death and will never become part of your estate and, because your Last Will & Testament only controls those assets which are part of your estate, those particular assets will not be controlled by your Will and are not subject to probate.

As a result, a beneficiary designation on a particular account or policy will almost always supersede any instructions in a Last Will & Testament concerning that same asset. It might be advisable to make those same designations in your Will as a fallback, but you will want to make those individual designations to ensure that your last wishes are fulfilled correctly.

Important Considerations in Designating Beneficiaries

There are a few important considerations you should keep in mind when deciding who to designate as a beneficiary of an asset or account.

The first is to avoid designating minors or incapacitated persons as beneficiaries. In a recent post, we discussed some considerations to make when naming beneficiaries in your will or trust. Those same considerations apply in beneficiary designations. For example, designating a minor may require a future guardianship proceeding through the courts to allow that minor’s guardian to accept the funds on the minor’s behalf, and designating an individual receiving public benefits may result in that beneficiary losing their benefits.

Another issue to consider is what happens when you name multiple beneficiaries on a transfer-on-death (TOD) or pay-on-death (POD) account and one or more beneficiaries predecease you. You generally cannot name contingent beneficiaries on TOD or POD accounts (though you can on IRAs and other qualified plans, and also on life insurance policies and annuities). What happens in this situation varies by state. In Florida, the default rule is that the funds in the account belong to the surviving beneficiaries in equal shares. Finally, it’s important to note that, under Florida law, if no beneficiaries survive the account owner, the funds belong to the owner’s estate.

You should be careful to review the laws of the state that govern each asset to ensure all will actually go where you want them to.

Reviewing and Changing Beneficiary Designations

For the most part, beneficiary designations are fairly easy to review and change. Simply contact your account or policy provider and ask them who the designated beneficiaries are on your accounts and policies. Not all companies will share this information over the phone, so be prepared to wait a few days to receive a written confirmation by mail or e-email (even if the company will tell you over the phone, we recommend getting that confirmation in writing anyway). If you need to change your beneficiary designations, ask the provider for a change of beneficiary form. After you complete and submit the form, be sure to follow-up with your provider to ensure the changes have been made.

If your beneficiary has special needs or receives other public assistance, it is important that you consult a Certified Elder Law Attorney to ensure that your beneficiary’s public benefits are not jeopardized by your designation.

Here at the Elder Law Firm of Clements & Wallace, our attorneys and staff will review your beneficiary designations with you to ensure that they conform with your estate plan and allow your beneficiaries to receive the benefits of your life’s work while maintaining any public benefits they may be eligible for. Call our office at (863) 687-2287 or use our contact form to schedule a consultation.