We are all busy and have a long list of “things to do” we tend to put off. One of those “things” that should be done periodically is reviewing and verifying the beneﬁciary designations on our various accounts. Most financial institutions require that you ﬁll out a beneﬁciary designation.
It tells the ﬁnancial institution the name of the person or organization that you want property or proceeds to go to, after your death. The beneficiary designation is part of your contract with that institution and will override whatever you have stated in your living trust or will. Moreover, the institution is required to distribute the property to the beneﬁciary you have named, regardless of that person’s circumstances or the person’s plans for the money.
If nothing in your life has changed, the beneﬁciary designations that you set up years or even decades ago may be sufﬁcient. Very few of us, however, don’t experience changes in family structure or preferences as time goes by, through births, deaths, adoptions, divorces, and such. And people change as well. Changed circumstances can lead to unintended results.
I have seen disappointing cases where sizeable insurance proceeds were paid out to someone with a substance abuse problem, only to be “smoked up” in a short period of time. I have also seen cases where money in a person’s savings account was not made accessible for their own funeral services! Stale designations can lead to situations where a former spouse, relative, or charitable organization that is no longer near and dear to you winds up with your property, instead of those important to you now.
When starting a new job and completing the many forms presented, we designate beneﬁciaries for our retirement plans, 401Ks, automatic stock and/or savings bond purchases, etc. Add to that various life insurance policies, bank accounts, investments, and CDs we accrue through the years, and it is easy to lose track of our designations.
We forget about some of our accounts; other accounts we know we have, but we’ve forgotten who is designated as beneﬁciary or whether a beneficiary has been designated at all. What’s more, even if you believe you have a beneﬁciary designation on ﬁle that reﬂects your wishes, that may not be the case. With the mergers and consolidations of banks, insurance companies, and brokerage houses, beneﬁciary designation forms do get lost or inadvertently destroyed.
As part of estate planning, beneﬁciary designations should be reviewed and coordinated with the plan. When a person establishes a living trust, the trust is usually designated as the beneﬁciary of the various accounts. Envision if you will a funnel – all of the property in the various accounts are brought together into the trust and then distributed through the medium of the trust to the various beneﬁciaries under the terms and conditions contained in the trust.
This way, funeral and other expenses can be paid before any distributions to beneficiaries are made, payments to beneficiaries can be conditioned on certain events or circumstances, payments can be equalized among beneficiaries and unforeseen circumstances can be anticipated and handled, such as a divorce or the death of one of your beneﬁciaries.