5 Common Beneficiary Designation Errors That Could Disrupt Your Estate Plan

If you have made the effort to create an estate plan, whether it is through a will alone or a pour-over will and trust combination, you must also make the effort to update any beneficiary designations to coordinate with your estate plan or your estate plan might not work the way you want it to. Think: life insurance policies; retirement accounts; investment accounts; bank accounts; and any other type of asset that can pass by beneficiary designation. The following are some common beneficiary designation errors that could unravel the estate plan you have carefully created.

1: Beneficiary Designations That Conflict with Your Will Or Trust.

It is a common misconception that either your will or trust will control who inherits all of your property. If you make conflicting beneficiary designations, it is possible that neither the terms of your will or your trust will control the distribution of the related property. A beneficiary designation is designed to avoid probate and to control the distribution of an asset without respect to the terms of your will or trust. This means that a properly executed beneficiary designation prevents your will or your trust from controlling the disposition of the asset. In other words, if the terms of your will and the terms of a properly executed beneficiary designation conflict, the beneficiary designation will control. Likewise, if your trust provides for the disposition of an asset, but you have not retitled that asset to your trust, that non-trust property will pass according to the terms of any properly executed beneficiary designation you have made for that asset. It is essential that your beneficiary designations coordinate with your will and/or trust and that you periodically review your beneficiary designations to ensure they are consistent with your estate planning goals.

2: Beneficiary Designations That Fail to List Contingent Beneficiaries.

If you have decided that you want a beneficiary designation to control the disposition of an asset rather than leaving it up to your will or trust, then don’t forget to name a contingent beneficiary or two, i.e. secondary and tertiary beneficiaries. If you die and the primary beneficiary you have designated is unable or unwilling to accept the property, that property will then be subject to probate and pass according to the terms of your will if you have one, and if not it will pass according to the law which usually means it passes to your next closest living relative.

If your estate plan consists of a will but not a trust, contingent beneficiary designations are the best way to avoid unintentionally triggering the need for probate. If your estate plan includes a revocable trust, consider making the trust the secondary beneficiary of an asset that you might not want the trust to control in the first instance. For example, you may want to designate your surviving significant other as the primary beneficiary of your life insurance policy or retirement account. They would then be able to do whatever they want with the policy or account left to them by beneficiary designation regardless of the terms of your will or trust. You may not want your remainder beneficiaries to have the same freedom. In that case, may want to designate your trust or your will as the secondary beneficiary so that the asset is divided among the beneficiaries you have named in your estate plan according to the rules and guidelines you have provided in your estate plan.

3: Failing To Account for Property That Cannot Be Governed by Beneficiary Designations

Some property and assets cannot be controlled by a beneficiary designation. Common examples are corporate shares, business interests, real property that is not owned jointly with rights of survivorship. Look to corporate by-laws, LLC Operating Agreements and how jointly held assets are titled to determine whether and how you need to update those documents to ensure they pass according to your plans.

4: Only Considering People as Beneficiaries

Not only can you designate individual people as beneficiaries of an asset, but you can also designate your estate, your trust, another person’s trust, a charity or others as a beneficiary.
If you name your estate as the beneficiary of an asset, such as a life insurance policy or retirement account you are essentially naming your will as the beneficiary. The asset will become part of your probate estate upon your death. This means the terms of your will control the distribution of the asset upon your death and the asset will be subject to the probate process. If you do not have a will, the assets will be distributed to your legal heirs according to state law. Probate provides court oversight to ensure the terms of your will are honored and in the event you have no will, that your legal heirs receive any property that remains after your final expenses and any debts have been paid.

Naming your trust as the beneficiary of an asset rather than funding your trust with that asset (i.e. retitling the asset to your trust during your lifetime) is a good option to ensure that your trust controls the ultimate disposition of that asset even if you do not want the trust to own the asset during your lifetime. A common example of this is when you have a bank account that you use as your operating account and it is tied to many autopay accounts. Sometimes banks will require you to close that account and reopen it under a different account number when you ask them to retitle it to your trust. To avoid the headache associated with doing that, you might instead choose to simply keep the bank account in your individual name and designate your trust as the beneficiary.

5: Naming Minors or People Who Receive Means-Tested Government Benefits as Direct Beneficiaries

If you are considering leaving assets to a minor or someone who is receiving means-tested governmental benefits, consider asking that person or their guardian whether a trust has been established for their benefit and designating that trust as the beneficiary of the asset. If no trust has been established for the individual, consider calling for the creation of a trust for that individual at your death. Individuals receiving means-tested governmental benefits who inherit assets directly instead of through a properly drafted special needs trust are likely to lose eligibility for those benefits. If a minor inherits assets, a guardian or trustee may need to be appointed to manage the property until the minor reaches the legal age of majority in the state where they reside.