Posted On: FEBRUARY 2024
A will or revocable trust may form the core of your estate plan, but for many people, a substantial amount of wealth bypasses these traditional estate planning tools and is transferred to their loved ones through beneficiary designations. These “nonprobate assets” may include IRAs and certain employer-sponsored retirement accounts, life insurance policies, and some bank or brokerage accounts.
Too often, people designate a beneficiary when they first acquire a nonprobate asset and then forget about it. But over time, these beneficiary designations may become inappropriate or obsolete as a result of changes in life circumstances, estate planning goals or tax laws. So, it’s a good idea to review beneficiary designations periodically — or when circumstances change — and update them if necessary.
As you conduct this review, consider the following best practices and potential pitfalls: Name a primary beneficiary and at least one contingent beneficiary. Without a contingent beneficiary for an asset, if the primary beneficiary dies before you — and you don’t designate another beneficiary before you die — the asset will end up in your general estate and may not be distributed as you intended. In addition, certain assets, including retirement accounts, offer some protection against your creditors, which would be lost if they’re transferred to your estate. To ensure that you control the ultimate disposition of your wealth and protect that wealth from creditors, it’s important to name both primary and contingent beneficiaries and to avoid naming your estate as a beneficiary.
Update beneficiaries to reflect changing circumstances. Designating a beneficiary isn’t a “set it and forget it” activity. Failure to update beneficiary designations to reflect changing circumstances creates a risk that you will inadvertently leave assets to someone you didn’t intend to benefit, such as an ex-spouse.
It’s also important to update your designation if the primary beneficiary dies, especially if there’s no contingent beneficiary or if the contingent beneficiary is a minor. Suppose, for example, that you name your spouse as primary beneficiary of a life insurance policy and name your minor child as contingent beneficiary. If your spouse dies while your child is still a minor, it’s advisable to name a new primary beneficiary to avoid the complications associated with leaving assets to a minor (court-appointed guardianship, etc.).
Consider the impact on government benefits. If a loved one depends on Medicaid or other government benefits (a disabled child, for example), naming that person as primary beneficiary of a retirement account or other asset may render him or her ineligible for those benefits. A better approach may be to establish a special needs trust for your loved one and name the trust as beneficiary.
Keep an eye on tax developments. Changing tax laws can easily derail your estate plan if you fail to update your plan accordingly. For instance, the SECURE Act, passed in late 2019, changed the rules for inherited IRAs.
To avoid unintended consequences, review your beneficiary designations regularly to make sure they’re still appropriate and that they align with your overall estate planning goals. We’d be pleased to answer any of your questions.
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