Thinking About Beneficiary Designations (Part 1)

Certain assets often have beneficiary designations:  life insurance, annuities (which are life insurance products), 401(k)s, IRAs and other retirement accounts.  Setting up your beneficiary designations the right way takes thoughtful planning.

Order of Things:  Beneficiary Designations Take Precedence over Your Will

First, you need to know that beneficiary designations take precedence over a Last Will and Testament, not the other way around.   I’ve had many discussions when a client comes in to change his or her Will.  We discuss changing the heirs, switching the executor, etc.…then I ask:  “Do you have any assets that have beneficiary designations?”

Sometimes the answers is:  “Well, yes, all of my assets have beneficiary designations.” 

My response: “So, if we just change the Will, your new wishes won’t be followed.  Your assets will still be going to the people currently named in your beneficiary designations when you die.”

Client:  “I thought if I changed the Will, it would change where those assets were going.”

Me:  “Nope.”

Your Spouse

If you’re married, likely you want your spouse to be your primary beneficiary.  But that’s not automatic—you need to actually fill out the beneficiary designation form and name your spouse so that assets will automatically pass to him or her at the time of your death.

If you don’t bother to fill out your beneficiary forms, that asset will not automatically go to your spouse.  If you have a Will that says it goes to your spouse that’s where it will go, but the asset will be a “probate assets” and have to go through probate procedures to get to your spouse.

There are times when you might want someone other than your spouse as a beneficiary.  Maybe your spouse is in a nursing home.  Maybe this is a second marriage with separate families and you want something going directly to your children.  Maybe it’s a retirement asset and you want it to go to a charity you support as a tax-free gift.  These are all things to consider in thoughtfully planning how best to set up beneficiary designations.

Secondary (Contingent/Alternate) Beneficiaries

You should also be able to set up secondary (sometimes called a contingent or alternate) beneficiary designation.  That is, if your primary beneficiary dies before you, where does the asset go?

Multiple Beneficiaries

You can set up more than one person as primary or secondary beneficiary.  You’ll just have to say “equally” or spell out the percentages that are to go to each person.

Can a Minor be a Beneficiary?

You can name a minor (someone under age 18), but it’s not a good idea.  If a person becomes a beneficiary under the age of 18, that person cannot receive the assets directly.  Depending on the value, the person’s parent would have to go through the hassle and expense of going to guardianship court before the assets could be paid out.  Then, they would have to follow the guardianship rules of accounting, reporting, court hearings, etc.  Finally, upon reaching the age of 18, the young person would receive the entire remaining lump sum.

Generally, if anything of significance is going to be given to someone who is still a minor, it should be done through a trust on behalf of a minor.  This allows you to privately pick the trustee (who’s in charge of the money), pick the age (or ages) that the person shall receive it (maybe 21, 25 or 30 is better than 18), and also specify if and for what purposes the trustee is authorized to use the funds on behalf of the beneficiary, prior to reaching your selected age of termination.

In my next post, I’ll address When is it NOT a Good Idea to Use Beneficiary Designations?


Necessary Lawyer Stuff

This blog is provided for general information and is not legal advice.  You should not take any actions based on the content of this blog without seeking the advice of an attorney.  To get advice on your particular situation, seek specific legal counsel from your own attorney.  Also, some of the content of this blog is Indiana-specific and may not apply to your particular state of residence. 

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