Estate planning is full of pitfalls and among the most common is misunderstanding the difference between beneficiary designations and wills.
The issue here (at least in part) is that popular media portrays wills as the be all and end all of a person’s final wishes when, in fact, this is not the case. People errantly take a set it and forget attitude to writing their will because they believe that nothing trumps the document. It’s called a last will and testament, after all, right? What could carry more clout? The answer: beneficiary designations.
Understanding Beneficiary Designations
A beneficiary designation is a fancy term for the act of choosing a person to inherit (or be the beneficiary) of a given item.
Life insurance policies, retirement accounts, brokerage accounts, bank accounts, and other financial accounts all include the option of including a beneficiary designation. Doing so is an important part of ensuring your financial assets are distributed according to your wishes when you pass. However, just as important to achieving this end is ensuring your beneficiary designations align with the content of your will.
No matter what your will says, the person named as beneficiary on a given account will inherit the asset. Period. Beneficiary designations trump wills but this does not mean conflict between the two can’t cause major problems.
When Beneficiary Designations Backfire
It’s easy to forget to periodically update your beneficiary designations and when this happens, problems ensue.
Say, for instance, you divorce but forget to remove your ex-spouse as beneficiary of your life insurance policy. State law will prevent your former partner from inheriting the asset but, unless you had named a contingent beneficiary, will do nothing to get it to whom you intend. In the absence of a named beneficiary, your estate becomes the beneficiary which may or may not be what you had hoped would happen.
An even trickier situation arises when beneficiary designations conflict with instructions written in your will. While the former will override the latter, this isn’t always enough to prevent loved ones from taking legal action in response to a perceived injustice. Imagine that you remarry and name your new spouse as the beneficiary of your estate but forget to change beneficiary designations on financial accounts naming your estranged children from your first marriage. Cue fireworks.
The best way to prevent such strife is to work with an experienced estate planning attorney who will not only help you ensure you estate plan remains up-to-date, but will likewise guarantee you make no oversights that will cost your loved ones when you are gone.
To learn more about getting beneficiary designations right or to address any other matter related to estate planning, do not hesitate to contact the Polaris Law Group either by calling or using the contact form on our webpage.