Why beneficiary designations are so important

People often think that beneficiary designations are no big deal, but they are!

For most people, their 401(k)’s,  IRA’s, and  life insurance policies make up a significant portion of their estate. Yet, many times the same people who spend hours reviewing their trusts and other estate planning documents hardly think at all about beneficiary designations for these assets. Because the beneficiary designations for these assets (which are typically filled out and signed by the clients on forms provided by their investment advisors or life insurance agents) govern how a significant portion of their estate will pass after they die and because there are significant income tax issues related to some of these assets (e.g., 401(k)’s, IRA’s, and other retirement plans), it is extremely important that these assets are discussed with an estate planning attorney and that the proper beneficiary designations are completed for all of these assets, so that your wishes can be carried out.

Three helpful hints for beneficiary designations.

Here are three helpful hints for beneficiary designations for 401(k)’s, IRA’s, and life insurance policies:

First, make sure you have a beneficiary designated on all of your 401(k)’s, IRA’s, and life insurance policies.  If you have a person or a charity named on such beneficiary designations, these assets will avoid probate.  However, if there is no beneficiary named or if your estate is named as the beneficiary, then this asset will have to go through the probate process if it is valued at over $75,000.  In many cases, clients plan using trusts and other documents to avoid a probate, and this kind of outcome is exactly what they were trying to avoid.

Second, remember to include a contingent beneficiary as well and to update the beneficiaries periodically.  Sometimes, the original beneficiary is named in the documents, but clients forget to name a contingent beneficiary.  If the primary beneficiary dies and the owner of the IRA, 401(k), or life insurance fails to update the beneficiaries, or if there is a tragedy with several family members all of whom were named as beneficiaries, then these assets will typically be payable to the deceased person’s estate, and there will be a probate.  Like all estate planning, beneficiary designations need to be periodically checked and updated as necessary.

Third, consider naming a trust as the beneficiary of your IRA, 401(k), or other retirement asset in certain situations.  Although there are several things that need to be looked at in making this decision, naming the trust as a beneficiary can be the best choice if there are minor children, adult children or who have alcohol, drug, or bi-polar issues, or adult children who cannot manage their finances well for whatever reason.  However, if you name a trust as the beneficiary for these assets, then it is imperative that you have certain provisions in your trust to permit the trust to be a beneficiary for these assets. Without this language, the income tax liability for these assets may be accelerated for your beneficiaries.

Call me today – 602.277.7000

John Even

Our firm has helped hundreds of families just like yours handle a wide variety of estate planning, probate, and trust administration issues.  In particular, we have experience in handling all different kinds of estate planning, probate, trust administration, guardianship, and conservatorship matters.  When families are not getting along, we can also help you to handle any disputes and litigation related to wills, trusts, guardianships, or conservatorships as well.  Please give me a call, so that I can help you work through these difficult issues with confidence.


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