Beneficiary designations determine who receives certain assets, such as life insurance, retirement accounts, and payable-on-death accounts, yet they are frequently overlooked in the estate planning process. Ensuring that your designations are current and align with your broader estate plan is key to achieving your estate planning goals. With that in mind, the Los Angeles attorneys at Schomer Estate & Wealth Advisors explain how beneficiary designations fit into your estate plan.
What Are Beneficiary Designations?
A beneficiary designation is a legal provision that allows you to name an individual or entity to receive an asset after your death. Common examples include:
- Life Insurance Policies: Beneficiaries are named to receive the death benefit directly.
- Retirement Accounts: Accounts like IRAs and 401(k)s allow for named beneficiaries, ensuring funds bypass probate.
- Payable-on-Death (POD) Accounts: Bank accounts that transfer to the named beneficiary without probate.
- Transfer-on-Death (TOD) Accounts: Used for brokerage accounts, allowing the transfer of securities directly to beneficiaries. In some states, even vehicle registrations can include a TOD designation.
Types of Beneficiaries
Understanding the different types of beneficiary designations is crucial to proper estate planning. These include:
- Primary and Contingent Beneficiaries: The primary beneficiary is first in line to inherit, while the contingent beneficiary steps in if the primary is deceased. This provides a safety net to ensure the asset is still passed on as intended.
- Per Stirpes vs. Per Capita: These terms dictate how assets are distributed if a beneficiary predeceases you. A “per stirpes” designation ensures the deceased beneficiary’s share goes to their descendants. In contrast, a “per capita” designation divides the asset equally among surviving beneficiaries.
Why Beneficiary Designations Matter
Beneficiary designations can override the terms of your Last Will and Testament. For example, if your Will leaves everything to your spouse but your life insurance policy names your sibling as the beneficiary, the insurance payout will go to your sibling. This is why keeping beneficiary designations up to date is crucial to avoiding unintended outcomes.
How to Use Beneficiary Designations Effectively
Beneficiary designations streamline the asset distribution process and help avoid probate. However, it is essential to regularly review and update these designations, particularly after major life events such as marriage, divorce, the birth of a child, or the death of a beneficiary. If these designations do not align with your estate plan, it can cause confusion, delays, or even legal disputes after your death. Consider the case where you create a trust to manage assets for beneficiaries who are young or inexperienced. If you forget to name the trust as the beneficiary of your life insurance, the policy proceeds may bypass the trust, contradicting your intentions and complicating the distribution process.
Common Beneficiary Designation Mistakes
Here are some frequent mistakes people make with beneficiary designations:
- Failing to Update Designations: After significant life events, such as divorce or the birth of a child, it is essential to update your beneficiary designations. Neglecting this can lead to unintended individuals, such as an ex-spouse, receiving your assets.
- Naming Minors as Beneficiaries: Since minors cannot legally inherit assets directly, any inheritance may be held in a court-supervised account until they reach the age of majority. To avoid this, create a trust and name the trust as the beneficiary.
- Vague or Incorrect Designations: Be specific when naming beneficiaries. Instead of listing “my children,” use their full names to prevent confusion. Also, ensure charities or organizations meet legal criteria if named as beneficiaries.
- Not Naming Contingent Beneficiaries: If you do not name a contingent beneficiary and your primary beneficiary cannot inherit, the asset may go through probate. Including a contingent beneficiary ensures a backup plan for your assets.
Do You Have Additional Questions about Beneficiary Designations in Your Estate Plan?
For more information, please join us for an upcoming FREE seminar. If you have additional questions about how beneficiary designations fit into your estate plan, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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