Beneficiary designations in theory sound like a wonderful idea. Clients are able to name individuals to receive the assets in the account upon their death without probate. However, having a beneficiary designation on an account is not always advisable. Our recommendations often depend on the family situation and the estate planning documents in place. Clients should check their beneficiary designations to ensure they are accurate every few years.

When To Have A Beneficiary Designation

Clients should always have a beneficiary designation in place for retirement assets and life insurance. If not, the account custodian may have a default beneficiary. If there is no default beneficiary, then the assets would pass to the estate and require probate. Beneficiaries for retirement assets are extremely important in order to get the greatest benefit from the account. 

If a client has created a revocable trust, the trust should be named as the beneficiary of any accounts that remain in an individual’s sole name and have not been retitled to the name of the trust. The named trust beneficiary would be as follows: [Name of Trustees], Trustees of The [Client Name] Revocable Trust under agreement dated [Date]. 

When Not To Have A Beneficiary Designation

Often people name individual beneficiaries on accounts not realizing that by doing so they are overriding the provisions they have made in their Wills or revocable trusts. This means if a client names children as beneficiaries through a beneficiary designation, the children will receive those assets outright and it will not be distributed pursuant to the terms of the client’s estate planning documents. If a child is a minor, then a court would need to appoint a guardian for the child to hold such funds. Such funds would then be controlled by someone the client did not choose and the child would be required to receive the funds at age 21. Another downside to naming individuals as beneficiaries is that there might not be enough assets passing to the revocable trust to fund specific bequests that were made to individuals under the terms of the revocable trust.

It also should be noted that upon the client’s passing, a named individual beneficiary has the right to the asset for personal use. This could be impactful if a client decided to leave one child as a beneficiary of the account with the thought that the child would use those funds to pay expenses. However, if at the time of the client’s passing, such child decides to keep the account for personal use or is going through a divorce or has a liability, then those funds are fair game for distribution to other individuals whom the client did not intend to benefit. For more information, please contact Kimberly T. Smith or another BW attorney.

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