Using Beneficiaries as Part of Your Estate Plan – Part I: Overview

One of the essential functions of an effective estate plan is efficiently distributing your assets upon death. Using a beneficiary designation on assets that transfer on death can be a tool to efficiently transfer certain assets with ease if properly completed. Assets that can be transferred to a designated beneficiary upon death include insurance policies, bank accounts, retirement accounts, or other investment vehicles that feature a transfer or payable on death designation.


Types of Beneficiary Designations


Beneficiary designations include primary, contingent, and sometimes default beneficiaries. Upon the death of the owner, the asset will be transferred or disbursed to the primary beneficiary. If the primary designation fails, then the contingent beneficiary will receive the transferred asset. The default beneficiary will receive the transferred asset in the event there are no other primary or contingent beneficiaries designated to receive the asset. In some cases the default beneficiary may be a trust established by the owner of the asset, or the owner’s estate.


Beneficiary Designations and Your Estate Plan


If beneficiary designations are properly placed with respect to your assets, they can serve as an efficient part of your estate plan to the extent you desire a straightforward distribution to one or more beneficiaries in either proportionate or disproportionate amounts. Furthermore, the designated assets will transfer outside of the probate process in the same way trust property would. Beneficiary designations are not a substitute for advanced estate planning or a will, but can serve as an effective piece of your estate plan under the right circumstances.


Reviewing Your Designations


You likely have multiple bank accounts, a 401(k) plan, individual retirement account, and/or brokerage account. Reviewing the designations on these assets are an important part of the estate planning process, and should be reviewed regularly with your estate planning attorney and financial advisor. Many times a person forgets the original designations made when the account was established. Changing your designations is straightforward, but you do want to be sure that you are accurately identifying the beneficiary and the percentage of the asset to be transferred so as not to cause the designation to fail.


Properly Documenting Designations


To use beneficiary designations effectively, you must ensure that they are properly worded and accurately reflect your intent in much the same way a will or trust disposes of your property. Designations may be as simple as providing the name of the primary or contingent beneficiary, or they may require you to provide specific information. For example, when designating a trust you would provide “John Doe, Trustee and any successor Trustees of the Jane Doe Revocable Living Trust under agreement dated June 30, 1987, as amended.” If you were designating multiple beneficiaries, you might designate “25% to Johnny Doe if he survives me, and 75% to Janie Doe if she survives me, but if either does not survive me, the other shall take 100%, and if neither survives me, 100% to the personal representative of my estate.” Because designations can become complex, you would be wise to review your designations as part of the periodic review of your estate plan.

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