When you think about estate planning, things like wills and trusts probably come to mind first. But what can often be overlooked is beneficiary designation forms – and even though these forms are simple, they can completely override what your will says if you aren’t careful.
If you don’t have these beneficiary papers coordinated the right way, they could cause hold-ups in your estate plan and even undo all your hard work.
What Is a Beneficiary Designation?
When you have any kind of account with money in it, a beneficiary designation form is a simple way to tell them what to do with it when you pass. You’ll likely see them on retirement accounts, life insurance policies, bank accounts, brokerages, or annuities. Sometimes, these are called transfer on death (TOD) or pay on death (POD) accounts.
Beneficiary designations allow assets to move without court involvement, which can simplify administration and speed up access to funds. In urgent situations, such as serious illness, updating a beneficiary form can be a practical and efficient solution. In some cases, a properly drafted financial power of attorney may even allow updates if the account owner becomes incapacitated. The streamlined process can bring a lot of peace of mind to families during a difficult time.
Beneficiary Designations Aren’t Enough Alone
Despite their convenience, beneficiary designations should not stand alone.
One reason we often see this is with the issue of liquidity. If every account is managed outside of your estate, there could be no funds left over to cover final expenses and debts, which may lead to complications.
Another concern involves minors. Naming a child directly as a beneficiary can trigger court involvement. Larger inheritances may require a conservatorship, which involves court oversight and annual reporting. Even smaller amounts placed in a custodial account typically transfer full control to the child at age 21. That may not reflect a parent’s long-term intentions.
Life changes create additional risk. Divorce, remarriage, the birth of a child, or the death of a named beneficiary all require updates. Financial institutions distribute assets based on the form on file, even if it contradicts your will. Outdated designations are one of the most common estate planning mistakes.
When a Trust Makes More Sense
There are some scenarios where it makes sense to name a trust itself as your beneficiary. The trust manages assets for minors or those with special needs, and the distributions are structured over time instead of as one lump sum.
Trusts combine the efficiency of beneficiary forms with the oversight of an estate plan.
A Simple but Important Review
Beneficiary designation forms are a great tool, but they aren’t the only ones you need. You can coordinate these forms with your overall estate plan and should review them every few years and after major life events to make sure nothing has changed.
If you aren’t sure where to start or how to combine approaches, this is a great time to begin the review process. At CPMT, we help clients coordinate these details so assets pass smoothly and intentionally. Contact us to schedule a review and make sure your plan is working exactly as you intend.