DOES A WILL OVERRIDE A BENEFICIARY DESIGNATION?

Do you have a last will and testament? If so, you’re already ahead of two-thirds of U.S. adults who lack this vital estate planning document.¹ But even if you have one, that doesn’t mean your estate plan is covered.

If it’s been years since you’ve opened your accounts, you might not be able to remember who the named beneficiary is on each one.

Are the beneficiary designations up to date on your retirement accounts, IRAs, annuities and life insurance policies? What if that person has died or others have been born since? What if your relationship has changed and you no longer want that person to get your money upon your death? (Think marriage, divorce, the death of parents, the birth of children or the falling out of an old friendship).

It’s not enough that you have a will, because a beneficiary designation will override it. So, how can you help ensure your estate assets wind up in the right hands?

To understand common estate planning mistakes, let’s first examine the difference between a last will and testament and beneficiary designation.

Regardless of what your will says, whoever is named as the designated beneficiary on each account will receive that asset. Period.

Your will only provides instructions for how you wish to distribute any estate assets that remain without a named beneficiary or surviving joint owner. On the other hand, a beneficiary designation applies to a specific asset, such as your retirement account, investment account, bank account, any annuities you have or a life insurance policy.

But overestimating the power of a last will and testament is by no means the only costly mistake people often make when it comes to estate planning. 

Here are five common mistakes you’ll want to avoid in your estate plan:

If you don’t name a beneficiary on any specific estate asset, your estate becomes the beneficiary. That means the asset could be subject to a lengthy, expensive and cumbersome probate process, which may complicate how and when the assets are distributed.

If your primary beneficiary dies first and you haven’t named a contingent (or secondary) beneficiary, it’s the same as having no beneficiary. Or, for example, if you and your spouse die at the same time (say, in an accident) and you haven’t named the kids as your contingent beneficiaries, your estates go into probate for a judge to help oversee how the assets are distributed.

Naming a contingent beneficiary has another advantage, too: If the primary beneficiary doesn’t want the asset for some reason (perhaps because of tax implications), he or she can waive rights to it – called disclaiming – allowing the money to pass to the contingent beneficiary. Many surviving spouses do this for their children, and it can be a smart way to avoid or reduce taxes. But if you fail to name a contingent beneficiary, this opportunity is lost.

Simply listing “my children” as your multiple beneficiaries can be a problem, especially in a blended family. Many states don’t recognize stepchildren when the word “children” is used. Or a family member with whom you’ve lost contact and with whom you don’t intend to share your assets could suddenly turn up and try to claim all or part of the estate.

Finally, what happens if one child predeceases you? Unless you get specific, that child’s share will go to your other children instead of to that child’s children. Unless it’s your intent to disinherit some of your children or grandchildren, you need to be more specific with each beneficiary designation.

It is perfectly acceptable to list multiple beneficiaries on your retirement accounts and other assets. However, simply listing “my children” as your beneficiary, intending for the account to be divided equally among your children can pose a problem, especially in a blended family. If you have three children and want all three to receive an asset, you must name all three as beneficiaries. 

Your heirs will get the money from your IRAs, retirement accounts, life insurance and annuities almost immediately upon your death, with no restrictions. If this worries you, consider naming a trust as beneficiary; then you can place limits on when and how the money is to be used.

Keep in mind, in any case, it’s still likely there will be a probate proceeding after someone dies, even if all of the assets are to be distributed via beneficiary designations. And even with a small probate proceeding, there will be some fees and expenses, the decedent’s final income tax return will need to be filed and income taxes may need to be paid. If the executor doesn’t have access to any funds in the estate to pay for these expenses – because all of the assets were distributed via beneficiary designations – they may find it difficult to pay these fees. If they’re a beneficiary of any of the assets, they may end up paying for these expenses out of their own pocket if the other beneficiaries don’t agree to chip in. 

In some cases (particularly if there is only one beneficiary), distributing all of your assets via beneficiary designations may be a good idea, but in other situations (such as having multiple beneficiaries who don’t get along), it may not. Distributing via a will is more costly and time-consuming, but in some cases, it may be the fairer choice. In many cases, creating a trust can mitigate a lot of challenges, but this is often more costly to set up and may be more complicated to maintain. As you can see, the choices are complex.

You’re devoting a lifetime to accumulating assets. Make sure their disposition is managed the way you want, or your efforts could be for naught. If you have any questions about your current accounts’ beneficiary designations, or which options may be best for you and your estate, connect with a financial advisor and an estate planning attorney so they can help you review your plan and discuss options that suit your personal circumstances.

¹ Caring.com. (2024, January). 2024 Wills and Estate Planning Study. Retrieved February 27, 2024, from https://www.caring.com/caregivers/estate-planning/wills-survey/

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