Beneficiary Designations – An Often Overlooked Part of Estate Planning

December 10, 2019

Creating a Wisconsin revocable trust or will is not the final step in the estate planning process. Beneficiary designations – naming who will receive which assets – is a must do second step of the estate planning process. Often, a person will sign a will or trust and believe that they have successfully created an estate plan that accomplishes their wishes. However, there is a critical additional step in the estate planning process. Beneficiary designations must be completed properly to create an effective estate plan.

Proper Beneficiary Designations = Part of the Estate Planning Process

Proper beneficiary designations are essential to an effective estate plan. A key aspect of estate planning is ensuring that a client’s assets work properly with the will or trust to accomplish intended results. And not only accomplish the intended results, but do so in a cost effective way taking into account the client’s goals, family, and assets.

As we remind our clients, estate planning is a process, and not a set of documents. To view it as anything less would result in a less than comprehensive estate plan.

Which Assets Typically Require Beneficiary Reviews?

Depending upon the estate plan and the purpose of that plan, at Wokwicz Law Offices, we generally want to review and consider beneficiary designations on the following types of assets:

• Individual Retirement Accounts
• 401(k) Plans
• Deferred Compensation Plans
• Other employer sponsored plans such as 403(b), 457, etc.
• Stock Option Plans
• Life Insurance
• Annuities
• Bank Accounts (Payable on Death or “POD”)
• Non-qualified Investment Accounts (Transfer on Death or “TOD”)
• Certificates of Deposit (CDs)
• Bonds and U.S. Bonds

It maybe that no updates are required, but typically updates are recommended based upon each clients estate planning goals, assets, and family. Additionally, the choice of what type of estate plan is created, will impact how and who should be named as beneficiaries on various assets.

Proper Beneficiary Designations Matter?

Clarifying Who Receives Your Assets

A will or trust will name which beneficiaries will receive your assets upon your death. Aligning the beneficiary designations with your plan is required to make sure that the intended beneficiaries actually receive certain assets.

For example, if you named a child (let’s call him Bill) on a particular savings account as a Payable on Death (POD) beneficiary, upon your death, that account will be distributed directly to Bill by your bank. If your will or trust says that your assets are to be distributed equally to your three children, that particular savings account (mentioned above) will not follow that “equal sharing” direction. Your bank will still distribute all 100% of that savings account to Bill. In short, your will or trust does not change your POD beneficiary designation in favor of Bill.

Avoiding Probate

Proper beneficiary designations can be crucial when aiming to avoid probate. In general, a non-trust account without beneficiary designations will be considered a probate asset and require court involvement upon death.

Drawing on our example above, maybe naming your hypothetical child, Bill, as a beneficiary on an account will help avoid probate. Yet should your other children also be named? Or should funds be distributed to your trust to help pay final bills, protect funds from your children’s creditors, and direct what should happen to these funds if a child predeceases you?

The likely answer is “yes”. Generally speaking, this account should name the trust to afford all of the protections that a trust allows, especially if the intent is not to leave 100% of your assets to Bill.

In any event, reviewing and planning how best to allocate, distribute, and avoid probate on this bank account is necessary. Leaving it “as is” with improper or no beneficiary designations is likely the worst option. The same applies for all of your other assets. Coordination of all of your assets with your estate plan is essential.

Tax and Other Considerations

An experienced estate planning attorney will account for and discuss options to minimize taxation. That attorney will consider the advantages and disadvantages of naming children directly on retirement assets versus naming a trust.

For example, an IRA could name children directly as beneficiaries. This may be appropriate and minimize after-death expenses and simplify the post death trust administration process, by having these funds go directly to the children.

However, we have to balance the ease of post-death administration and tax issues, with other potential concerns such as a child’s creditors, a child who cannot manage assets, a child who is too young to manage and control assets, or a child with special needs. We also need to determine what should happen if a child dies before the parent. We would not want to name a young child or disabled child directly on any assets.

In short, there are many beneficiary designation considerations that an experienced estate planning attorney will discuss with you to help determine the best way to accomplish your goals. (There are so many tax and other considerations, that we will not even attempt to discuss them in depth in this article.)

No Quick One-Size Fits All

We wish there was one easy answer on who to name for beneficiary designations. However, there is no such quick answer. Each asset has to be reviewed individually to determine how best to name a beneficiary, taking into account the goals and your personalized estate plan.

The impact on your estate plan, if proper beneficiaries are not designated, can be catastrophic. As experienced estate planning attorneys, we can discuss and help choose the personalized estate planning beneficiary designations that fit your unique family, goals, and desires. This is not in addition to creating your estate plan – we consider this an integral aspect of your estate planning process.

Revocable Trusts and Beneficiary Designations

Since avoiding probate is often a primary reason for creating a revocable trust, this topic deserves a greater study.

An experienced attorney must review your assets and consider proper beneficiary designations to help further the goals of your revocable trust and to avoid probate. All of your assets may not be directed to your trust by beneficiary designation, especially if there are other concerns or if there are other tax and post death administration matters to be considered.

When taxable retirement assets could go directly to healthy adult children, or alternatively be distributed through a trust, you must consider your beneficiary designations. Discussing and considering the pros and cons of both approaches is a must as part of any revocable trust based estate planning process.

The Bottom Line on Beneficiary Designations

Proper beneficiary designations require a review and updates to your beneficiary designations. To properly do so, we must consider your goals, family situation, heirs, beneficiaries, assets and estate plan. Failure to properly integrate assets and beneficiary designations will result in unnecessary post-death expenses, probate, and unintended consequences.

The bottom line is that creating a will or trust estate plan is only part of the estate planning process. It’s never the final step. Coordinating beneficiary designations with your unique family situation, while taking into account your will or trust plan, is as important as creating a will or trust in the first place.

Designate the Right Beneficiaries for Your Estate Plan

We believe that estate planning is a process, and that beneficiary designations and beneficiary updates are essential component of that process. We invite you to contact us for help designating the right beneficiaries for your needs, wishes, family, and assets.