Estate Planning For The Long Run

Estate Planning For The Long Run

What are beneficiary designations?

by | Aug 26, 2021 | Estate Planning

Beneficiary designations allow you to name someone to receive a specific asset when you die. Sometimes this is referred to as a beneficial designation, or pay-on-death designation, or transfer-on-death designation.

Making a beneficiary designation can be useful because it allows the particular asset to transfer directly to the beneficiary, without a probate administration. It can also provide quick access to funds, which can help settle your final expenses. Does that mean you can or should always use beneficiary designations to transfer your assets upon your death? No!

 What types of assets allow for beneficiary designations?

Retirement accounts, such as a 401(k) or IRA, commonly have beneficiary designations. In fact, that is the primarily how those assets are distributed when a person dies. Life insurance policies are also assets that commonly designate beneficiaries.

Financial accounts, such as bank accounts and brokerage accounts, typically allow for beneficiary designations. In some states, real property can have a transfer-on-death designation as well.

Assets that may not allow for beneficiary designations, or that require greater efforts to designate a beneficiary, are business interests in a corporation, llc, or partnership. Intangible assets, such as stock, might also limit or not allow for the designation of a beneficiary.

When should you make or not make beneficiary designations?

Beneficiary designations can be useful when you want to make sure certain people receive certain assets upon your death, and that they can claim those assets on their own. However, they do not address all the factors that might come into play when you die.

For example, if you designate a minor beneficiary to receive an asset, the minor will not be able to claim the asset directly, as the law prohibits a minor from inheriting an asset directly. In these instances, some form of guardianship proceeding is typically required.

It might not be prudent for you to designate a beneficiary who is disabled or otherwise unable or unfit to manage their own finances. In these situations, you may create more harm than good, as the person may misuse the funds and cause harm to themselves. If a beneficiary is on government assistance, then the assets could disqualify them from that assistance. Beneficiary designations might not be the best option in these scenarios.

What are the other options?

Alternatively, you can convey assets into a trust, which trust will set forth the beneficiaries to receive the assets when you die. This is useful because asset in a trust will always avoid probate, even if a beneficiary predeceases you. A trust is also useful because it allows you to address those scenarios that beneficiary designations do not address, such as minor beneficiaries, disabled beneficiaries, or unfit beneficiaries. The trust can make provisions for them, but in a way  that does not harm them, disqualify them from government assistance, or otherwise require them to go through guardianship proceedings first.

Things to watch out for

It is important to make sure your beneficiary designations are up to date. Changing your beneficiary designation is simple, yet many people forget to do this when their circumstances change. For example, if the initial beneficiary of an asset is a spouse and you and your spouse get divorced, you will want to change the beneficiary designation. If the initial beneficiary has predeceased you, then you will want to change the beneficiary designation. It is also prudent to have a primary and a contingent beneficiary designation, in case a beneficiary does predecease you, that way the asset can avoid going through probate.

Part of a good estate plan is making sure that the right assets have the right beneficiary designations. This is often a personal task that is unique based on your circumstances. Do not forget to revisit your beneficiary designations from time to time as your circumstances change.