For many people, estate planning is a topic that conjures up painful thoughts of meetings with an attorney and a huge price tag. It doesn’t have to be that way. In fact, one of the smartest estate planning moves you can make likely won’t cost you a dime.
Estate planning is the process of deciding what you want to happen with your assets when you die, and then putting it in writing to make it official. When you’re ready to go into a lot of detail with your estate plan you’ll want to enlist the help of a lawyer to put together a trust or, at the very least, a will. In the meantime, you should make sure your beneficiary designations are up to date for all accounts and insurance policies that allow them.
If you’re like many of us, much of your wealth is contained in your bank accounts, retirement accounts and life insurance policies. In most cases, you can designate your beneficiaries for these types of accounts in a few minutes online, or with a simple form.
Beneficiary designation almost always trumps a will or trust.
Example of an estate plan gone wrong
Consider this real-life disaster scenario I ran into on the job several years ago. I received a call from the surviving spouse of a client who had recently passed away. She assumed she was the rightful heir of his retirement account managed by the firm I worked for. When I dug into the client’s records, I discovered that the most recent beneficiary listed for his account was his ex-wife. The woman he was married to when he passed wanted to provide a copy of his trust to us to prove she was entitled to receive the money. Unfortunately, it doesn’t work that way. By law, we had to transfer his retirement assets to the ex-wife. Even though our client went to the effort and expense of creating a trust, since he didn’t update his beneficiary designations, his intentions for one of his largest assets were not carried out. Talk about uncomfortable conversations; I’ll never forget that one.
Tip: Beneficiary designation almost always trumps a will or trust. Even if you spent a few thousand dollars creating a trust that details your wishes for your assets, the company managing your assets is obligated to follow the instructions on the most recent beneficiary designation on file.
ACTION STEP! Print or screenshot this post right now to remind you to update your beneficiaries this week. And follow through. It won’t cost you anything and you’ll get great peace of mind.
Types of accounts that have a beneficiary designation:
- Retirement accounts with your employer
- Individual Retirement Arrangements (IRA)
- Life insurance policies
Bank accounts rarely have a beneficiary designation, unless you specifically request it. If you have a spouse or other person listed as joint owner, they will remain in control of the assets when you pass. If you have a trust, it’s usually best to re-title bank accounts in the name of your trust. Consult the attorney that helped you set up the trust.
Most banks and credit unions allow you to register your account(s) with Transfer on Death (TOD) designation. It’s pretty much the same as a beneficiary designation. This is a good idea even if you have a joint owner, in case both of you pass together, or relatively close together.
If you have a trust, it’s usually best to re-title bank accounts in the name of your trust. Consult the attorney that helped you set up the trust.
These days, many financial institutions make it easy for you to see or update your beneficiary online. The thing is, few have migrated beneficiaries into your online profile that you named on paper forms years ago.
You’ll be smart to log into your online profile and check your beneficiaries. If the people you want to receive your assets aren’t visible, go ahead and name them as beneficiaries now. While you’re at it, print the pages listing your beneficiaries and keep them in a file with other end of life paperwork. You’ll be doing yourself, your heirs and your financial companies a big favor.
Types of beneficiaries:
- Primary – First in line to receive the assets. Can be one or more persons, or organizations. You say the percentage each will receive.
- Contingent – Receives assets only if primary beneficiary(ies) are unable to receive them; for example, if they pass before you.
Per Stirpes beneficiary designation
Per stirpes is a term used to describe what happens to assets if more than one beneficiary is named and one or more is not able to receive their share.
Example: A man has two adult children and names them as equal (50/50) beneficiaries to receive his $100,000 life insurance benefit. If Child A is no longer living when he dies, Child B would receive the full proceeds $100,000. However, if Child A has children of her own, the policy owner could designate require that if either of his beneficiaries dies before he does, their share would pass on to their children. This concept is referred to as per stirpes.
If any of these concepts are confusing to you, just ask a representative with your financial institution(s) to help you. This is business as usual for them.
When it comes to estate planning, we’re often advised to create a will and establish a trust. Both are good ideas. But even if you have a will or trust, your assets may end up in the wrong hands when you die if you don’t have proper beneficiary designations in place.
Whether you have a formal estate plan or not, contact all the companies you currently have investments, life insurance or bank account balances with and update your beneficiaries. It won’t cost you a dime and you’ll get instant peace of mind knowing your money will go where you want it when you pass.
Important: The information provided here is for educational purposes and should not be considered advice. Before you make any decisions, consult a trustworthy financial professional and/or tax planner.
Wow, I would’ve never thought that a beneficiary would trump a will or trust. That’s insane! I’ll have to do this this week. Even though I’m young, just in case :). Thanks for the write up!
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Great reminder. I don’t have an ex-wife, so my beneficiaries are likely unchanged from when I set them years ago, but it never hurts to double check.
I recently got married, and as such we have set our beneficiaries to each other. I’m always paranoid there’s one account out there I’ve missed, though. We still need to get a will done, though.
This article reminds me of a situation that happened in my extended family years ago. Guy gets married, they have a son, then they get a divorce. Guy raises son as a single father. Eventually he remarries and his son grows up, marries, and has children of his own. Guy, new wife, son, and family are all very close until, one day, guy and new wife are in a terrible accident. Guy dies on scene, new wife dies the next day. Unfortunately, no will is found. Since new wife was still alive when guy dies, all assets go to her. When she dies the next day, all assets go to her MOM (she never adopted son and she has no kids of her own). Mom apparently sees no problem with this. She keeps all the assets and son and family get nothing. Moral of the story: Have a will! Also, check and update your beneficiaries periodically!
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My understanding is beneficiary accounts are not held up in probate the same as a will (in some places).
When I just rented my apartment and had a 10 years old car, and beneficiaries on my retirement accounts, I figured why bother with a will. Now I have a condo, a newer car, and more accounts. We also had a medical scare with my dad, and I realized power of attorney is significant so someone can make sure bills get paid if I can’t, and the power of health decisions, and taking about what you want with those people I’ve picked. For me it was worth the money to have things documented and hopefully cause my loved ones less stress in a not bad situation.
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You’re right about that. The company I worked for only required a certified death certificate and a current address of the beneficiary(ies) to pay out the proceeds. It didn’t matter how large the amount was. We didn’t ask for accept wills or trust docs. Things got a little murky if the named beneficiary was not living when the owner died.
Good thinking on your part to plan ahead!
Great topic here. I am currently writing a similar blog post about some situations I have found myself in. I am finding this very thing with a few loved ones that have died in the last few years. This is becoming such a problem in the digital age – Passwords, multiple retirement accounts, beneficiaries, and all kinds of other fragmented issues. Thanks for sharing