On Friday we kicked-off our series for National Estate Planning Awareness Week, check out that first post here. Today I’ll talk about Beneficiary Designations!
Beneficiary designations on retirement accounts and life insurance policies are an important part of your estate plan. These are important documents because the designations (not your Will), govern the disposition of these assets on your death. The documents are also important because for many people retirement assets and life insurance policies may make up a substantial portion (and perhaps a majority) of their wealth.
There have been many instances where a decedent’s failure to coordinate his or her beneficiary destinations with the rest of the estate plan has led to unintended results. You could end up leaving retirement assets to an ex-spouse, or unintentionally disinheriting newly born children or grandchildren. In addition, if you name a beneficiary who is a minor, someone may end up having to go to court for the appointment of a guardian for the child. However, if the beneficiary is a trust for that minor’s benefit, the problem of having a guardian appointed is eliminated.
If you fail to name a beneficiary, the plan or policy documents may determine where the assets go. Some plans will require distribution of the asset to your probate estate (which can increase administrative costs and taxes), other plans may provide for direct distribution to your spouse or heirs (but not necessarily in the manner you intended). In either case, you lose control.
So when developing your estate plan, and every time you review it, make sure you coordinate your beneficiary designations on retirement assets and life insurance.