All About Beneficiary Designations
Beneficiary designations are a common element in estate plans. We have opportunities to set up these arrangements when purchasing life insurance, setting up retirement plans and bank accounts, and on other occasions.
It is a good idea to slow down and think about beneficiary designations. Correctly used, beneficiary designations can be a great convenience that saves time and money. On the other hand, an incorrect beneficiary designation can frustrate the most expensive and detailed Will and Trust planning.
What Are Beneficiary Designations?
Generally speaking, the purpose of a beneficiary designation is to indicate who will receive an account upon the death of the account owner. Beneficiary designations are commonly used with life insurance policies, IRAs, 401(k)s, and other types of accounts with death benefits.
For example, you may set up a life insurance policy to name your spouse as your primary beneficiary, with your kids as equal contingent beneficiaries if your spouse predeceases you. The terms of this arrangement are set forth in your beneficiary designation.
Beneficiary designations are typically signed and filed with the account custodian. You should keep copies, of course, so that your designation may be proven if issues arise.
Once created, a beneficiary designation is simple to administer. Upon the death of the account owner, the account custodian verifies certain information (discussed below) and then pays the account funds to the designated beneficiary.
Note that the designated beneficiary may be different than the beneficiaries named in the account owner’s Will or Trust. Because the beneficiary designation is a form of contract, the account will be paid to the designated beneficiary regardless of the terms of the owner’s Will or Trust. Accordingly, it is important to coordinate the beneficiary designations with the client’s overall estate planning objectives.
What If There Is No Beneficiary Designation?
Upon the death of the account owner, the account custodian will determine whether there is an effective beneficiary designation in place. If the account owner did not create a beneficiary designation, or if the designated beneficiary predeceased the account owner, then the funds will be distributed to the persons indicated in the account documentation.
Account documents often provide for undesignated funds to pass into the probate estate of the account owner. In this event, the probate heirs of the account owner will receive the funds, but the heirs will need to open a probate estate to do so.
In some cases, account documents provide that certain family members of the account owner will receive the funds. In this case, no probate administration is required. Instead, the indicated family members will need to provide whatever claim forms and other documents the account custodian may require.
As may be evident from this discussion, there is a risk in relying on beneficiary designations. If the designated beneficiary predeceases the account owner, the intent of the account owner may be frustrated. These risks may be avoided through the use of a trust or other estate planning technique (discussed below).
How Do I Change My Beneficiary Designation?
Once a beneficiary designation is created, it is generally a simple matter to change the designation. Changing the designation is actually a very common event, as family and other circumstances change.
To change a beneficiary designation, the account owner needs to contact the account custodian to obtain a Change of Beneficiary Designation form. Typically, these forms are available on the website of the account custodian. The account owner completes, signs, and submits the form in accordance with the instructions.
The account owner should be careful to keep copies of all forms submitted. In addition, the account owner should keep copies of all correspondence from the account custodian indicating that the requested change was recorded. On occasion, the account custodian may make a mistake in processing the change, so it is important for the account owner to confirm the change was correctly recorded.
What If I Am the Designated Beneficiary?
The beneficiary does not need to take any action until the death of the account owner. It is generally the case that the account owner may change their beneficiary designation at any time (as discussed below), so the interest of the beneficiary does not vest until the death of the account owner.
Upon the death of the account owner, the designated beneficiary provides the account custodian the death certificate, claim forms, and other required documents. The account custodian then releases the funds to the beneficiary. (Often, the account custodian will offer to set up an investment or other account in the name of the beneficiary rather than distributing a lump sum payment.)
TODs and PODs
Transfer On Death (TOD) and Payable On Death (POD) bank accounts are another type of beneficiary designations. With a TOD/POD account, you can maintain ownership and control of the account during your lifetime, but the account will pass to the designated beneficiary upon your death.
TOD and POD accounts have the same pros and cons as other beneficiary designations. They are cheap, easy to set up, and effective. On the other hand, they do not address every contingency (such as if the designated beneficiary predeceases the account owner) and there is the possibility of forms being lost or not submitted correctly.
Real Property
It is possible to create a deed for real property that includes a type of beneficiary designation. With this deed, the property will pass to the designated beneficiary upon the death of the property owner.
To set up this type of arrangement, the deed must be carefully prepared to address possible contingencies. For example, what if the property owner desires to give the property to multiple beneficiaries? What if the designated beneficiary predeceases the property owner? What if the property owner later wants to change the designation?
The deed must be correctly signed, witnessed, and notarized in accordance with Florida law. It must also be recorded with the County Clerk.
Trusts as Beneficiaries
Many of the downsides and uncertainties related to beneficiary designations may be overcome by using the owner’s Trust as the account beneficiary.
For example, the account owner could create a beneficiary designation stating that the funds will be distributed to the owner’s Trust upon the death of the owner. The Trustee of the owner’s Trust would then receive the funds and distribute the funds according to the terms of the Trust.
In this manner, the owner would only need to file a beneficiary designation once. If the owner later wanted to change the recipient of the funds, the owner would just create a Trust Amendment. Note that one Trust Amendment could effectively be used to change the beneficiaries of many accounts if the Trust were the designated beneficiary on the accounts.
It is also true that the Trust would solve the problems related to a predeceasing beneficiary. A typical Trust identifies contingent beneficiaries to receive the Trust assets in the event that the primary Trust beneficiaries predecease the creator of the Trust.
