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Naming Beneficiaries in Estate Planning Documents

Assets with beneficiary forms seem appealing to people trying to set up estate plans. Such assets have the benefit of going directly to the heirs and avoiding the lengthy and sometimes costly probate process. However, people need to make sure that they coordinate their named beneficiary assets with the rest of their estate planning documents such as wills and trusts. Otherwise people may inadvertently sabotage their own plans for their possessions after they die because such forms override wills - wills do not override beneficiary designations. Those making estate plans need to know common errors to avoid when executing named beneficiary forms on assets.

Types of Named Beneficiary Assets

There are a variety of assets that can have named beneficiary forms. Some of the most common examples include life insurance policies, retirement accounts, payable or transferable on death bank accounts, U.S. savings bonds and securities such as stocks, bonds and mutual funds.

People may designate a variety of different types of beneficiaries. Some may opt to name an individual outright, while others may choose to name a group of people such as "all of my grandchildren who survive me." A person may also name a trust or his or her estate as the beneficiary of such an asset. Finally, a person may choose to make a charity or other organization a beneficiary.

Mistakes to Avoid With Named Beneficiary Assets

There are several common mistakes involved with named beneficiary forms that people can avoid with a little bit of planning and regular review of their plans. The first mistake is assuming that a person's will can sufficiently sort out any discrepancies between the distribution of assets in the will and named beneficiary forms. The forms always take precedence over the will, so it is crucial that a person coordinate the documents.

Another common mistake that one can easily avoid is not naming a secondary beneficiary. In the event that the person a testator names as beneficiary for an asset dies before the testator, the asset may go to the named beneficiary's heirs at the testator's death if the testator failed to name a secondary beneficiary. That situation is fine if the testator wishes for the beneficiary's heirs to have the asset in the event that the beneficiary is no longer alive; however, most people have wishes about where their assets should go if their first choice for a beneficiary cannot accept them - and they should be the ones to decide where their money goes, not inheritance laws.

Some make the mistake of naming minors as beneficiaries. It is not advisable to do so. Minors are limited in inheriting money before they reach the age of majority, so it is a better plan to establish a trust and name the trust as the beneficiary of the asset until the minor turns a certain age. In that situation, the testator would also need to establish detailed instructions for the trustee on how to manage the funds for the minor until the minor has control over the funds him or herself, including such things as what are acceptable expenses for which the trustee can use trust funds. A person might also want to consider making the age that the trust funds are available to the trust beneficiary higher than either 18 or 21 years old. It is not uncommon for people at that age who suddenly come into a great deal of money to spend it foolishly.

Another mistake that people make in dealing with IRAs, specifically, is failing to plan to avoid taxes on the distribution of the funds by failing to have named a beneficiary on the account or naming the account holder's estate as the beneficiary. If a person does that, then the IRA goes through probate and the heirs need to withdraw the funds within five years. Such a withdrawal incurs taxes on the withdrawal amount, along with capital gains taxes and increased income taxes on future earnings. If the IRA has a named beneficiary, that beneficiary can keep the money in a stretch IRA and withdraw the money over time, avoiding such stiff tax penalties.

Finally, many forget to update the beneficiary forms after major life events such as marriage, divorce, births and deaths. It is tempting to forget about such forms after filling them out, but it is crucial that a person review such forms regularly to ensure that the documents still reflect his or her wishes and do not accidentally leave out someone he or she wanted to include or that someone who is no longer in the person's life inherits through the documents. For example, when a person gets a divorce, it is a good idea to name a different beneficiary for life insurance policies and retirement accounts than the ex-spouse, such as a trust for any children from the marriage. In fact, state law may automatically void such designations upon divorce.

Using named beneficiary documents in an estate plan is an effective way to keep assets out of the long and sometimes costly probate process, making things easier on a person's loved ones after he or she passes. However, unless a person makes such documents part of a comprehensive estate plan, he or she may end up causing confusion and hassle for his or her heirs and may pass contrary to the decedent's actual wishes. If you have not made an estate plan or a significant amount of time has passed since you reviewed your estate plan, do not hesitate to consult with an experienced attorney who can discuss your situation with you and advise you of your options.


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