The Estate Planning Detail That Quietly Overrides Your Will

When it comes to estate planning, there can be a tremendous amount of complexity, and it can be overwhelming knowing where to begin. I am not a lawyer, and we do not provide legal advice, but as financial planners we do assist with estate planning. Over the years, I have learned a great deal about how estate planning works and, more importantly, where confusion can lead to unnecessary complications.

Once it is understood that default estate plans exist for everyone (state laws dictate what happens if someone dies without their own plan)[i] one of the most overlooked tools is beneficiary designations. Many people do not realize that accounts or assets[ii] with beneficiaries or rights of survivorship can transfer almost immediately upon death, bypassing probate or trust administration. Properly updated beneficiary designations can direct a significant portion of what happens without court involvement.

Despite this, most people are not aware:

1. How much of their estate may be controlled by beneficiary designations
2. That updating beneficiaries is usually simpler and far less expensive than updating a will or trust
3. That failing to update beneficiaries can be catastrophic[iii]

At its core, an estate plan should answer two basic questions: who gets your stuff and how do they get it? Naming a beneficiary on an account can often answer the “who,” but not the “how.” Wills and trusts can address both. Understanding which assets can have beneficiaries, and the limitations of simple designations, provides a strong foundation for estate planning and can prevent avoidable problems for your heirs.

The limitation of beneficiary designations is that they generally provide unrestricted access. You cannot add stipulations or protections for the recipient. That is why it is important to recognize when restrictions or protections may be helpful or necessary. Situations that often warrant more structure include minor children, divorce or remarriage concerns, creditor or lawsuit protection, special needs beneficiaries, recipients receiving government benefits, or concerns about spending or addiction. Once assets are received outright, they cannot be protected from others or from the beneficiary themselves.

If your intent is to provide immediate access and full control, beneficiary designations can be the simplest and fastest solution. Brokerage and bank accounts, for example, can often be titled TOD (Transfer on Death) or POD (Payable on Death), reducing or eliminating assets that would otherwise pass through probate[iv]. What many people fail to realize is that beneficiary designations and joint ownership with rights of survivorship override what a will says, so keeping those up to date is paramount. A common example is someone who remarries and updates their will but forgets to update the beneficiary on a retirement account, resulting in the asset going to an ex-spouse. Other issues include failure to remove now deceased beneficiaries, naming minors outright, or failing to shift assets into trust when appropriate.

This is why beneficiary designations should be reviewed at least as regularly as your estate planning documents. Updating them is usually straightforward and inexpensive, and it can significantly reduce conflict after you are gone.

Estate planning is not easy to think about, but you have to start somewhere. A good place to begin is by asking:

 

Are there accounts where adding beneficiaries would make things easier?

 

Are all of your existing beneficiary designations up to date?