The Basics of Beneficiary Designations

If you have a retirement account, bank account or a life insurance policy, you may have been asked to designate a beneficiary. Beneficiary designations name one or more person to receive the assets in an account upon your death. The beneficiary has no interest in the asset until you die, and can be changed at any time. Beneficiary designations can be a great tool when it comes to estate planning and you should consult with your estate planning attorney about how to use them most effectively. Here are some of the questions clients frequently ask about them:

1. What kinds of assets can I name beneficiaries for?

Beneficiary designations are most commonly left on financial accounts like bank accounts, brokerage accounts and retirement accounts. On these types of accounts, they may also be called “payable-on-death” (POD) or “transfer-on-death” (TOD) accounts. Beneficiaries are also designated on life insurance policies.

In Arizona, you can also transfer title to your real property upon your death using a beneficiary deed prepared by an attorney. Like a beneficiary designation, a beneficiary deed does not give the beneficiary any interest in the property until after your death. You can also revoke or change beneficiaries on a beneficiary designations or beneficiary deed while you are alive.

In Arizona, you can also transfer title to a vehicle using a beneficiary designation so long as you are the sole owner of that vehicle.

2. If an asset has a beneficiary designation does it go through probate?

Many clients come in with the goal of avoiding probate. Sometimes, this means a trust, but other times, beneficiary designations can be just as effective. Generally, assets with beneficiary designations transfer without needing to go through probate. Usually, beneficiary deeds for houses and transfers on death for vehicles also keep those assets out of probate. For many this is a big appeal for naming beneficiaries on assets. Often times, estate planners use beneficiary designations to reduce the amount of assets subject to probate so that the estate may be collected using a small estate affidavit.

3. Why wouldn’t I use beneficiary designations?

There are many benefits to using beneficiary designations in an estate plan, but you have to take care to make sure that they are consistent with your overall goals. For example, let’s say you make a trust with $2,000,000 of assets in it. Your trust has provisions that leave all of your assets in equal shares to your two kids, Jack and Jill. Your IRA, valued at $500,000 has a beneficiary designation that leaves that asset to Jack alone. Upon your death, trust assets would be split equally between Jack and Jill and they would each get $1,000,000. The IRA would be distributed to Jack alone, leaving him with $1,500,000, compared to Jill’s $1,000,000. That’s not equal at all.

Estate plans using beneficiary designations can also be thrown off balance when the you spend down one account more than the other. For example, imagine that you named Jack as beneficiary on one checking account with $500,000 in it. You designate Jill as beneficiary on an IRA worth $500,000. Years pass. You start taking distributions from the IRA. You start spending the money in checking in the account. Now, the amount left to each child is unequal. This doesn’t even take into account that if the IRA holds investments, it’s value likely fluctuates without you doing anything at all.

Another issue clients run into is forgetting to update their beneficiary designations when life circumstances change. Let’s say a beneficiary becomes disabled and receives government benefits. You may remember to update your estate plan to maintain their eligibility, but not your beneficiary designations. The same is true for if a beneficiary on an account dies. Rather than just updating your estate plan, you have to remember to update all of the beneficiary designations where you named that beneficiary.

4. How do I change my beneficiary designations?

It is a good idea to check your beneficiary designations from time to time. It is not unheard of for financial institutions to lose information when they update their computer systems or when banks merge. Some institutions allow you to view your beneficiary designations online or in their apps. If that is not an option for your financial institution, you may have to call or pay them a visit.

Before you change your beneficiary designations you should consult with your estate planning attorney. They will help you figure out what beneficiary designations are right for your plan. If you do find that your designations need an update, you will probably have to visit the financial institution who holds that account. Every institution is slightly different in how they handle changes. During your visit you should tell them who you would like the new beneficiary to be. Your attorney may also give you specific language give to the financial institution. The institution will likely require you to fill out a form or sign documentation confirming the change in beneficiaries.

5. Can I name my trust as a beneficiary?

You can name your trust as a beneficiary, but that doesn’t mean you necessarily should. While it is possible to name your trust as a beneficiary on your accounts, you should consult with an attorney before you do so. There are situations where you would want to name your trust as a beneficiary. For example, if you would like to leave your assets in a trust for a disabled beneficiary you would want the beneficiary named on the assets to be the trust for their benefit. There are other times though, where there may be negative tax consequences for naming a trust as beneficiary. Depending on the financial institution, they may also give you some push back on actually changing the designation.

While beneficiary designations can be a handy tool to utilize in your estate plan, you should be mindful of how and when you use them. You should consult with an estate planning attorney to learn how to use them most effectively in your plan.