The Importance of Aligning Beneficiary Designations with Your Estate Plan

Certain types of assets pass to your loved ones by “beneficiary designation” outside of your estate plan.  This means that when you die, these assets go to whomever you have listed as the beneficiary of your account, rather than according to the distribution provisions in your Will or Trust. 

The most common examples of these types of assets are retirement accounts, life insurance policies, pay on death accounts, and any assets held in “joint tenancy” or titled as “joint.”   When you set up these types of accounts, you designate primary and contingent beneficiaries.  The primary beneficiary is first in line to inherit the asset after you die. The contingent beneficiary will inherit if the primary beneficiary cannot. 

If you are like the majority of people, after you first set up these accounts, you rarely think about who you designated as the beneficiaries.  Because these accounts pass outside of your estate plan, however, it is important to review these designations as part of the estate planning process to ensure they match your current wishes.  Without taking this step, your estate plan may not work as you intended. 

The following examples show how failing to review beneficiary designations can undermine an estate plan:

• Jane’s Will left all of her assets to her husband Jack.  When Jane dies, her 401(k) account, which she set up before she married Jack, lists her sister Sara as the beneficiary.  Because Jane’s 401(k) account held most of her assets, Jane’s sister Sara ends up inheriting the majority of Jane's estate.
  
  
• Bridget’s Trust stated that her partner Bob could live in her house until he died, after which the house would pass to Bridget’s children from her first marriage.  The deed to the house, however, said that Bridget and Bob owned the house as “joint tenants.”  When Bridget died, Bob inherited the house outright under the deed.  When Bob died two years later, the house passed according to Bob’s estate plan and not to Bridget’s children.  
  
  
• Fred designated his wife Ginger as the beneficiary of his life insurance. After Fred and Ginger divorced, Fred did not change his beneficiary designation.  When Fred died unexpectedly, Ginger claimed the life insurance benefits.  Although an Idaho law prohibits ex-spouses from inheriting assets after a divorce, Fred’s family had to bring a lawsuit against Ginger to get back the life insurance proceeds.  By the time the lawsuit concluded, Ginger had spent most of the money and Fred’s family recovered very little.
  
  

In each of these examples, Jane’s, Bridget’s, and Fred’s assets did not end up where they wanted, but instead passed according to outdated beneficiary designations.  To avoid this result with your own assets, make sure you review and update your beneficiary designations.  You can often find out your current beneficiary designations by logging in to your online account.  You can also call your financial institution to request this information. 

Who you should designate as the beneficiaries of your accounts depends on your unique estate plan.  Here are a few examples of how these assets are typically designated:

• Retirement Accounts:  If you are married, your spouse is the primary beneficiary.  If you have minor children, the contingent beneficiary is usually your Trust or Will (specifically, the testamentary trust created by your Will).  If you have adult children, your children are listed as the contingent beneficiaries, unless you are holding your adult children’s assets in trust after you die, in which case you name your Trust.
  
  
• Life Insurance Policies:  If you are married, your spouse is the primary beneficiary.  Your Will or Trust is usually the contingent beneficiary.
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• Pay on Death Accounts:  If you are married, your spouse is usually the primary beneficiary.  Your Will or Trust is usually the contingent beneficiary.

Reviewing these beneficiary designations during the estate planning process and whenever you experience a major life change will ensure that your wishes are carried out both within and outside of your estate plan.