The Importance of beneficiary designations

Life insurance and retirement plans compose the largest part of the estate for many people. Insurance death benefits, IRAs, Annuities, and 401(k)s do not pass under your will. They pass under contract law to those persons or organizations who are designated as the beneficiary.

Yet many people don't review their designations, and don't make sure they are current. In many cases, more value passes by beneficiary designations than under the will. Which one is more important, the beneficiary designation or the will? You can spend a lot of time carefully crafting a will, but it will not direct who gets these assets.

When you started work, were you married? Did you name your mother as beneficiary of group life insurance provided by your employer? How many children did you have when you bought an annuity? Did you name the children individually? If you did, children born after that date would not be beneficiaries. Do you really want minor children to be named as beneficiaries so that a court-appointed guardian has to be named to accept the money for them? All of these questions should be addressed as part of your estate planning process.

Changes of beneficiary are easy to make. You must request a change of beneficiary form from the company and fill it out in accordance with their directions. Most of these forms provide a small blank space about two inches long to write a designation. Don't be a prisoner of the form! If your designation is longer or more complicated, attach a sheet. You are not limited in the disposition of your $500,000 IRA just because the blank on the form isn't long enough to fill in what you want.

Most lawyers who do estate planning ask clients to bring beneficiary designations in for review as part of the estate planning process. If changes are necessary, explicit instructions are given for how the new beneficiaries should be named; and, in some cases, the lawyer prepares the change requests herself as part of the legal services provided. Think about it. The lawyer drafts the will. If there is a large asset that passes outside the will, don't you want the same care, tax planning, and advice for its disposition?

DO NOT take the advice of the clerical staff at the financial institution about whom you should designate as a beneficiary. They really don't know all of the ramifications. Follow the directions given by your attorney. If you run into problems, consult the attorney.

DO NOT name minors as beneficiaries of any contractual benefit. If you die while they are still minors, they will not be able to access the benefit without the expensive and burdensome procedure of having a court appointed guardian. You may use language in your beneficiary designation to allow your Executor to name a custodian of the property of any minor beneficiaries under the Pennsylvania Uniform Gifts to Minors Act, therefore avoiding a court appointed guardian. It can take over fifty words to state it correctly. You should consult an attorney to articulate such a designation.

DO NOT name a child with special needs as a beneficiary. This can cause the child to lose government benefits. Plan benefits should be payable to a special needs trust.

DO NOT put banks accounts and other assets in joint names to "avoid probate" unless your attorney directs you to do so. You could be destroying a carefully crafted estate plan and unwittingly exposing assets to claims and taxes.

Beneficiary designations for retirement plans and IRAs are in a world unto themselves. First, the pay-out options provided by the particular plan must be determined. Then the income tax and estate tax repercussions must be taken into account. If qualified plan benefits or IRAs are a substantial part of your estate, you need to have the help of a financial professional who is familiar with these matters.