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AMBLER | KEENAN | MITCHELL | JOHNSON
Written By: The American Academy of Estate Planning Attorneys
What Are Beneficiary Designations?
Although you may not realize it, beneficiary designations govern many of your most valuable assets. Life insurance policies, retirement plans, and investment and bank accounts, as well as mutual funds and brokerage accounts all may have beneficiary designations. In some states, even personal property, such as your vehicle, may carry a beneficiary designation. These designations dictate who will inherit the asset in the event of your death not withstanding a provision to the contrary in your last Will and testament or a Trust agreement.
The Forgotten Beneficiary
The problem with beneficiary designations is that we often forget about them. Frequently, a beneficiary designation is filled out as an afterthought without giving any consideration to how the designation fits into an overall estate plan. For example, when you opened your bank account you likely filled in a designated beneficiary; but do you even remember doing so? Do you remember who you designated? Or, when you filled out that stack of paperwork you were handed after being hired for your current job, you likely designated a beneficiary for your employer-sponsored retirement plan and life insurance policy. Again, do you remember designating a beneficiary? The answer is probably “no.” People fill out beneficiary designations all the time without giving the choice of beneficiary much thought. Unfortunately, the consequences can wreak havoc with your overall estate plan in two important ways:
- Failing to change your beneficiary designations – just as your comprehensive estate plan should be updated when certain events in your life occur, your beneficiary designations should be as updated well. For example, if you filled out your retirement plan and life insurance beneficiaries ten years ago and named your boyfriend/girlfriend as your beneficiary, it could be a problem if you are now with someone else. Conversely, you might have named your mother as a beneficiary on your mutual fund account but have now married. Either way, someone you would not want to inherit your assets stands to do so in the event of your death because you failed to change your beneficiary designations upon the occurrence of a life event that should have triggered a review of your beneficiaries.
- Missing beneficiary designations – missing beneficiary designations are also problematic. Maybe you never got around to filling out the beneficiary designations for your retirement account or maybe your original beneficiary has since died and you failed to designate a successor or contingent beneficiary. Either way, if there is no living named beneficiary, the assets controlled by the beneficiary designation will not go as intended. The assets will go as laid out in the underlying contract. For example, the life insurance policy, custodial agreement, or other contract might provide that the assets go to the surviving spouse, to blood relatives, or to the estate of the deceased. Someone you did not intend might receive the assets instead of people you would have preferred. Additionally, traditional IRA and retirement plan assets are tax-deferred, meaning they are taxed when distributed. If there is no designated beneficiary, the assets must be distributed more quickly than otherwise, and, therefore, taxed more quickly.
Don’t Let This Happen to You!
As you can see, beneficiary designations play an important, yet often forgotten, role in any comprehensive estate plan. With that in mind, take some time to review who your designated beneficiaries are. Then, make a point to review those designations periodically and every time a life event calls for a review of your estate plan. If you have questions or concerns regarding your beneficiary designations, be sure to consult with an experienced estate planning attorney, like the attorneys at Ambler Keenan Mitchell Johnson, to make sure the plan you’ve carefully put in place will always reflect your planning goals.