Why Counting on Beneficiary Designations Might Not Be the Best Plan

Best laid plansWith certain financial instruments, the beneficiary designations control the asset dispersion, regardless of other provisions, such as those in a will or trust.

What if your spouse just passed away and you learn that the life insurance proceeds from your deceased husband will be paid to his ex-wife? Shouldn’t you, the current wife, be entitled to the insurance payout? What if your husband thought he took care of this and changed his will to make you the beneficiary of his entire estate: that changes the policy designation as well, right? No, but the Commonwealth of Virginia has a statute to make things right.  A problem might arise, however,  if you no longer live in Virginia.

Depending on state law, beneficiary designations can be the trump card of estate planning. In almost all cases under this scenario, the ex-wife will receive the life insurance proceeds.

That’s why assigning and regularly reviewing your beneficiary designations is a critical part of estate planning. Remember that assets for which beneficiary designations trump wills or estate directives include the following:

  • Individual and Group Life Insurance;
  • Traditional and Roth IRAs
  • Qualified Retirement Plans and 401(k)s;
  • Employee Stock Ownership Plans (ESOPs);
  • Contractual rights under deferred compensation plans; and
  • Employment contracts

It’s vital to remember that a change to your will or your trust doesn’t automatically make changes to all your assets listed in those documents.

Beneficiary designations are effective immediately after death. Since they override any instructions made in your will or trust, those assets won’t have to go through probate. Be certain that your beneficiary designations are updated and coordinated with your overall estate plan. It’s a good idea to review and update them, after any major life event like a marriage, divorce, or the birth or adoption of a child.

Finally, you should also name contingent beneficiaries. The primary beneficiaries will inherit the funds first. But if they have already passed away, or if you die together, your assets would go to the named “secondary” or contingent beneficiaries.

Reference: WMUR (April 5, 2018) “Money Matters: The trump card of estate planning”


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