Beneficiary designations as part of your estate planning scheme

Beneficiary-based accounts like life insurance, pensions and retirement accounts are an important part of estate planning.

Estate planning is much more mainstream nowadays than it has been in the past. We generally realize that, regardless of our income level, we need an estate plan to handle asset protection, guardianship of our children and such issues as health care wishes and powers of attorney designations.

We may not understand, however, that policies and accounts that pass automatically upon death are also an important part of estate planning that should be carefully considered.

What types of accounts involve named beneficiaries?

Most of us have at least one type of account that involves a beneficiary designation. These accounts are common, and can include such things as:

  • Insurance policies
  • Pensions
  • Retirement accounts
  • Investment/brokerage accounts (IRA, 401k, etc.)
  • 529 accounts for the education of minor children/grandchildren
  • Checking and savings funds
  • Bonds

Certain real estate holdings, such as titles held with a right of survivorship, as joint tenants or with a life estate, will also transfer automatically upon death independent of the probate process.

How do beneficiary designations fit into estate planning?

Beneficiary-based accounts are a relatively straightforward way to allocate assets and funds without the need for probate to disperse them. Because many of these funds (like a life insurance policy, for example) pay out a set amount, they can be a good way to split assets amongst heirs without the need for an accounting at a later time.

Once you make a beneficiary designation on an account, it will usually remain active until it expires under the terms of the account or policy, or it is manually revoked and replaced. This means that if you named your former spouse as the beneficiary of your accounts, but you are now divorced, you still need to manually remove that person and name a new beneficiary in order for your current spouse to actually receive the funds when you pass away. This even holds true in jurisdictions like California where a divorce automatically voids all will and testament provisions bequeathing property to a spouse. (See California Probate Code Section 6122 for more information.)

Furthermore, these types of designations are governed by contract law policies, and will even usually supersede express language disinheriting someone in a will or by virtue of divorce. For example, let's say that you amended your will to expressly prevent your eldest son from inheriting any property because of a long-running disagreement. You didn't, however, take the added step of changing the beneficiary designation on your sizable life insurance policy that had named him and his two brothers as equal recipients of the policy amount at that time of your death. This means that, even though your wish to disinherit him is clear via your will, your eldest is still entitled to collect an equal one-third share of your life insurance.

Beneficiary designations are an important part of your overall estate planning scheme, and they, like your whole estate plan, need to be regularly reviewed and updated as circumstances change. This will help you avoid such awkward situations as your children from a former relationship or your current spouse not receiving any of your life insurance proceeds because they instead went to your ex-spouse.

To learn more about how beneficiary accounts fit into your estate plan, and to get started on your comprehensive estate plan and wealth management strategy, contact an experienced attorney like Connie Yi today. Call her at 925-484-0888 or send an email to schedule a consultation at one of her four convenient office locations (Pleasanton, San Mateo, San Francisco and Sunnyvale).