Checking Beneficiary Designation Forms is a Critical Part of Good Estate Planning
When I work with clients to create their estate plan, a critical part of this planning is to review their financial assets. The purpose of this is (1) to gauge the size of their estate and types of assets so we can be sure we are creating the appropriate plan, (2) to create a record for their executor or agent of all of their assets, (3) to review how their assets/accounts are titled and discuss any necessary changes, and (4) to ensure their beneficiary forms are up-to-date on any applicable assets. This is one of the benefits of working with an estate planning attorney versus creating DIY documents.
What is a Beneficiary Designation Form?
Some assets allow you to name beneficiaries on the company's internal form, known as a beneficiary designation form, to indicate who should receive your funds at the time of your death. Common assets that allow for beneficiary designations include retirement plans such as IRAs and 401Ks, life insurance policies, investment accounts and annuities. Bank accounts and bonds typically use POD or TOD designations (payable-on-death and transfer-on-death). As the account holder, you complete the forms, send them back to the financial institution, and then the forms are kept on file with the financial institution until your death. If you do not complete the beneficiary designation form, the asset will either be paid to your Estate upon your death or paid out in accordance with the company's distribution policy.
Why does it matter?
Beneficiary designation forms supersede your Last Will and Testament. Many clients are surprised to learn this and ultimately may upset their estate plan greatly by failing to update these forms. For example, if your Will specifically leaves your entire estate to your husband, but your beneficiary form for your IRA leaves the account to your sister (perhaps you weren't married when you initially completed the form), the account will go to your sister.
This is true even if your Will specifically states otherwise. For example, if your Will specifically leaves all of your IRAs equally to your children, but one of your beneficiary forms leaves the account to just your oldest child, that one account will pass to your oldest child only. When a client has a child with a disability or substance abuse issue, they may do this trusting the oldest child will "know what to do" or "do the right thing" for the impacted sibling. Because there are many different tools to accomplish my clients' goals, I strongly encourage clients not to create an estate plan based on the honor system. It can create unnecessary tax and gifting consequences, and places a tremendous burden on the oldest child.
When reviewing your estate plan, your attorney will work with you to make sure your designation forms are consistent with your wishes. In some cases, naming someone else (i.e. your sister instead of your husband) on the account may be intentionally done as part of your estate plan, but in other cases, it's may be an unfortunate oversight. For this reason, simply executing your Last Will and Testament is not sufficient.
Below are some quick tips for updating your forms:
Discuss with your attorney. When updating your Will and reviewing your estate plan with your attorney, make sure to discuss necessary updates to your beneficiary designation forms and any legal issues to consider when naming your beneficiaries.
Name contingent beneficiaries. Be sure to name contingent (back-up) beneficiaries or select "per stirpes" (if appropriate) in the event that your primary beneficiaries predecease you.
Do not name minors outright. Do not name your minor children or grandchildren as outright beneficiaries.
Update as needed. Be sure to update these forms (and your estate plan) after major life changes such as divorce, marriage, or death of named beneficiary.
Send the forms in. Make sure you send the signed form to the financial institution. Simply completing the form and maintaining it with your own records is not sufficient.
Keep a copy. Maintain a photocopy of the fully signed form for your records and consider giving a photocopy to your attorney. Between bank mergers, closures and other institutional changes, forms can get lost.
If your estate plan needs to be updated or you are unsure if your beneficiary designation forms are properly completed, we can work together to help you navigate any necessary changes. You can contact us by phone at 267-625-8877, by e-mail at jbarton@bartonestatelaw.com or by visiting our "Online Booking" page.