The Importance of Coordinating your Beneficiary Designations with Your Will and Living Trust

Using beneficiary designations offers a simple and cost-effective method for the transfer of your assets at death. It is also important for estate planning because naming beneficiaries on bank and financial accounts, life insurance policies, annuities, retirement accounts and other tax deferred accounts is a crucial part of an estate plan for the distribution of assets.

Although beneficiary designations are easy and inexpensive to arrange, it is important to remember that beneficiary designations supersede anything in your will or living trust regarding how your assets are to be distributed. Consequently, it is important to coordinate your beneficiary designations with your will or living trust in order to avoid confusion and ensure that your intentions are clear.

Why Use Beneficiary Designation?

Using beneficiary designations for the direct transfer of assets after death is based on a contract a person has with his or her bank, financial institution, retirement plan or life insurance company. Because beneficiary designations allow your assets to be directly transferred to a designated person or persons, you avoid the costly and time-consuming process of probate administration for your assets. Financial institutions refer to these types of accounts with designated beneficiaries and “payable on death (POD) accounts” or “transfer on death (TOD) accounts”.

Prior to your death, you can change designated beneficiaries any time you want. However, if you change the distribution instructions in your will or living trust because of a beneficiary’s death and then forget to change the deceased beneficiary on your bank or financial account, probate administration may be required for distribution of those assets. Consequently, a contingent or successor beneficiary, should be named as a backup beneficiary to receive the assets in the event the primary beneficiary has predeceased the account holder. Contingent and successor beneficiaries can include a person or a living trust.

What to Consider When Using Beneficiary Designations

It is important to remember that there are potential problems with coordinating beneficiary designations when listing minors as beneficiaries on accounts. For example, before a bank or financial institution is going to pay proceeds to a minor from a payable on death account, a guardianship or conservatorship may be required which can be costly and time consuming. Listing a living trust as a beneficiary on accounts or policies is an alternative method of distributing the proceeds so the funds can be held in trust for the benefit of minor child.

Another important consideration when using beneficiary designations for accounts, there can be less flexibility with how financial institutions are able to distribute your assets at death. Many financial institutions have limited options for naming beneficiaries and how assets are to be distributed. To address this problem, designating a living trust as a beneficiary to receive assets from accounts or policies allows more flexibility in the methods of distributing assets to beneficiaries under a single unified distribution plan.

Beneficiary designations on all accounts and policies should be reviewed on a regular basis. Changes in the nature and value of your assets may require a readjustment of how your assets are distributed by beneficiary designations on accounts as well as through the instructions contained in your will or living trust. In addition, major family changes such as a birth, adoption, death or divorce may also require a readjustment of your beneficiary designations and overall distribution plan.

Updating Your Estate Plan

If you do change beneficiary designations, you should consider the impact on the other parts of your estate planning so that your assets distributed in a manner that you intended. The bottom line is that using beneficiary designations in coordination with your will or living trust provides a simple and cost-effective method of transferring and distributing your assets to family and loved ones.

Schedule a Free Consultation with an Ann Arbor Estate Planning Attorney

In my practice at Ager Law Office, I help individuals and families with all aspects of estate planning including with beneficiary designations. From my Ann Arbor office, I serve clients throughout Washtenaw County. If you’re interested in a free consultation to discuss creating a cost effective estate plan tailored to your needs for a reasonable flat fee, or updating your current estate plan, call (734) 649-0784, send an email to bill@agerlawoffice.com, or use the online contact form.