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The Importance of Beneficiary Designations Matching Your Estate Plan

On Behalf of | Jun 25, 2020 | Estate Planning

In a typical year, Severns & Howard usually sees during the summer months an increase in interest to establish or update their estate planning documents.  This could be due to the nice weather and the beginning of summer travels, timing of retirement, a health event that occurred for them or a loved one over the winter, or just finishing those spring to-do lists.  While this year has seen some changes in the above causes, we are still seeing an increase in interest to make sure that their estate plan is following their current final wishes.

One service that Severns & Howard provides to our estate planning clients is to ensure that all assets follow the estate plan you set out in your documents.  Many types of property and investments pass outside of probate and allow you to designate who will receive them after your death.  This article explains the importance of beneficiary designations in the estate planning process.  It is important that these designations are kept up to date and are consistent with the rest of your estate plan.  During our meetings, Severns & Howard discusses with you these accounts and assists you in completing change of beneficiary forms, if necessary, to ensure that such accounts and beneficiary designations reflect your estate plan and final wishes.

When you open up an investment account or retirement plan or buy life insurance, the company encourages you to name beneficiaries who will inherit the property on your death. The choice you made at the time may not have taken your estate plan into consideration. To review your beneficiaries, get a copy of all of your beneficiary designation forms. Check to make sure that your beneficiaries are consistent with the rest of your estate plan or, if they are different, that the difference is intentional. If you made these designations online, print a copy of the page so that you also have a paper record. Once you have collected all of these forms, put them in a folder with your other estate-planning documents so that you and your heirs can quickly and easily find them in the future.

In determining how to make your beneficiary designations, the following are the considerations for each type of account:

  • Bank and investment accounts. If you have a revocable trust as part of your estate plan, you can make the trust the owner of all of your bank and investment accounts. This way you avoid the need to name anyone as beneficiary and you still avoid probate. Then, all of the protections provided in the trust–for instance, that children do not receive their inheritance until a certain age or provisions for who receives the funds if a beneficiary predeceases you–will apply to the accounts. If you’re not using a revocable trust, simply name those who will receive your estate under the terms of your will. Or you have the option to name no one. If you do not designate a beneficiary, the account will pass according to the terms of your will and, while you won’t avoid probate, you’ll make sure that the people you want will receive the assets, that your personal representative will be in charge, and that any changes you make in the future–such as disinheriting your wayward nephew– will apply to the accounts.
  • Life insurance. Unlike bank and investment accounts, the ownership of many life insurance policies–especially those that come as an employment benefit–cannot be transferred to your revocable trust. And there is really no benefit to doing so in any case (although there might be some tax and long-term care planning reasons to transfer property to irrevocable trusts). Instead, the beneficiary designation is the most important decision. If you have a revocable trust, you may name it as the beneficiary for the reasons mentioned above. Or you can name particular individuals. The beneficiary designation form will permit you to name alternates in the event that the first person or people you name predecease you.
  • Retirement plans. First, don’t transfer your retirement plans to your revocable trust. The only way to do so is to liquidate the plan first, which would be a taxable event. Second, don’t name your revocable trust as a beneficiary of your retirement funds without consulting your lawyer. In most instances, if your spouse is not the beneficiary, the retirement plan will have to be liquidated and the taxes paid within 10 years of your death. On the other hand, if you have a relatively small amount of funds in retirement accounts, this might not be a big problem. It is much more important with retirement plans than with life insurance or other investments that you designate a beneficiary, because there are different rules for different beneficiaries. If your spouse inherits your IRA, your spouse can treat the IRA as his or her own. Your spouse can either put the IRA in his or her name or roll it over into a new IRA. The rules for a child or grandchild (or other non-spouse) who inherits an IRA are somewhat different than those for a spouse. The beneficiary must withdraw all of the assets in the inherited account within 10 years. There are no required distributions during those 10 years, but it must all be distributed by the 10th year.

Severns & Howard, P.C. can help you with your estate planning and to make sure that your beneficiary designations align with your estate plan and are as beneficial to your intended heirs as possible.  For a review of your estate plan or to get started on your planning, please feel free to contact our Severns & Howard at (317) 817-0300 to request an initial intake telephone call with our paralegal, Alesha Dugger.