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Beneficiary Reviews: Extremely Important, but Often Overlooked

Sam Payne, RICP, VP Business Consultant

Beneficiary designations are incredibly important, but often misunderstood or not understood at all by those who are preparing to leave a legacy.  

Many people believe that a trust will handle the distribution of assets like life insurance, IRAs, retirement plans, annuities, and some employee benefit plans. In fact, these assets are all controlled by beneficiary designations. Understanding how to properly name beneficiaries, and how to avoid common mistakes in beneficiary designations, is key to ensuring that assets end up where intended.

If you don’t designate a beneficiary to receive these assets after your death, it’s possible that the assets will be distributed to someone other than who you intended. For example, some custodial
agreements will automatically default to the spouse, and if there is no spouse, then to the owner’s surviving children, and then to the estate. This is a helpful default in the case of no beneficiary designations, but it doesn’t ensure your assets will go to the person you would have chosen.

Our financial advisor role gives us an unparalleled advantage to assure that our client’s legacy intentions are fulfilled.  A simple but incredibly important part of planning is to make sure we have a conversation about those desires with our clients, and follow-up by reviewing all beneficiary designations on accounts that have a beneficiary designations possible.  The most common accounts or policies that we will have in our view include Life Insurance and Annuities. But don’t stop there.

In addition to reviewing the obvious accounts, spend some time reviewing bank checking and savings accounts, retirement accounts, bonds and investment accounts for “Transfer on Death” beneficiary designations. 

In reviewing these designations you can help your clients stay current and avoid unintended consequences. Failing to update these designations after life events such as births, marriages, divorces or other changes in relationships or family dynamics may result in either assets being distributed to unintended recipients, or failing to be distributed to someone you did intend to include but never got around to including.

Some of the common beneficiary designation mistakes, aside from not naming one at all, would include:

Naming the estate as beneficiary – while this may eventually result in your heirs receiving the assets you intended, it is not the most efficient way to do it.  This can also result in greater costs to the estate in the form of taxes and probate costs, and provides substantially less flexibility when it comes to how and when the assets are distributed.

Naming a trust as beneficiary – While this is possible, the unintended consequences of naming a trust as beneficiary for some accounts, if realized, may be substantially greater than the decedent ever intended.

For example, designating a trust as the beneficiary of an IRA can be an effective estate planning tool.  However, this already complex topic has become even more complicated by the passing of the Secure Act. It is effective only if all the parties involved—especially the IRA owner, the IRA custodian, the trustee of the trust, and any attorneys representing the beneficiary—agree on the interpretation of the provisions of the trust and applicable laws. Conflicting interpretations could result in a delay of disposition of the assets and can be quite frustrating for those involved.

Naming minor children as beneficiaries – If minor children have been named as the beneficiary of your life insurance policy, then it can become legally complicated.

Minor children cannot inherit money directly. Instead, the state would appoint a legal guardian if you hadn’t done so, which is a lengthy and costly process. That guardian would then determine how the money is managed and spent—and it may not coincide with your wishes.

If you want the money to benefit a child while the beneficiary is still a child, then you must set up a trust and appoint a trustee. The simplest way is via the Uniform Transfer to Minors Act, which is free — you just appoint a trusted, responsible adult to handle the money on the child’s behalf.

As you can see, naming beneficiaries is incredibly important, and designations should be reviewed on a regular basis.  I believe, as we approach the end of the year, the time to hold beneficiary reviews with your clients is now.  By having the conversation, you will be able to identify their wishes, educate them on the importance of proper beneficiary designations, and assure their stated desires are fulfilled.