Using Beneficiaries as Part of Your Estate Plan – Part II: Considerations

An earlier post on this blog provided an overview of using beneficiary designations as part of your estate plan. Recall that beneficiary designations are a way to transfer property automatically upon the death of the asset owner outside of the probate process. This post is part II of that discussion, and include some of the pros and cons of using beneficiary designations, as well as a few special considerations related to certain forms of beneficiary designations.


Pros and Cons of Using Beneficiary Designations


Beneficiary designations can be a simple and effective mechanism to transfer your property in much the same a will or trust distributes your property. The advantages of beneficiary designations include the ease in which it can be set up and the speed and in which the beneficiary receives the asset. Also, the owner of the asset has flexibility to designate any of combination of shares to any number of primary and contingent beneficiaries. Beneficiaries may be individuals, trusts, charities, or the property owner’s own estate by way of its personal representative.


Beneficiary designations do come with some disadvantages based on the circumstances of the property owner, the named beneficiaries, or other estate planning mechanisms that may be in place. One disadvantage is that the transfer or payment on death will occur automatically and without further oversight or consideration of the beneficiary’s circumstances or ability to responsibly manage the assets received. Because of that fact, beneficiary designations provide less control over the distribution and use of an asset as opposed to other estate planning tools, like trusts. Furthermore, beneficiary designations may require more administrative work to make sure that the designations are kept current as it relates to beneficiary information, including the collection of social security numbers and current contact information.


Situations to Consider When Using Beneficiary Designations


The first issue to consider is the importance of keeping the beneficiary designations up to date. You should know that if your primary, contingent, and default beneficiaries predecease you or the designations are otherwise invalid, the asset will likely be considered to be included in your probate estate and require probate proceedings to be distributed per the provisions of your will. Another special consideration is where you are designating a minor as a beneficiary. Under New York law, transfers to minors in amounts over $10,000 may only be paid to a guardian appointed by the court for the minor beneficiary. If designating a minor as a beneficiary you will have to consider the circumstances under which they will receive the property. In lieu of a direct designation, you may want to designate a trust established for the minor’s benefit. Lastly, the marriage and divorce of the the owner the asset or the beneficiaries may have an effect on the operation of the designations. To avoid this, the owner of the asset should periodically review the designations to ensure the beneficiary information is current and in effect. While beneficiary designations are straightwared in form, the effect may require additional considerations which should be reviewed in the course of the estate planning process.

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