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Know the difference: beneficiary designation vs. will

Avoid these costly mistakes when making a beneficiary designation.

Are the beneficiary designations current on your retirement accounts, IRAs, annuities and life insurance policies?

It’s not enough that you have a will, because beneficiary designations on the above override wills.

If it’s been years since you’ve opened your accounts, you might not be able to remember whom you designated as your beneficiary. What if that person has died or others have been born since? What if your relationship has changed and you no longer want that person to get your money when you die? (Think marriage, divorce, the death of parents, the birth of children or the falling out of an old friendship.)

Beneficiary designation vs. will: Why is it so important to know the difference?

Regardless of what your will says, whoever is named as the beneficiary on each account is who will receive that asset. Period. Your will only provides instructions for how you wish to distribute the remaining assets in your estate, of which the accounts with beneficiaries are excluded. Therefore, a beneficiary designation supersedes what is in your will.

And that’s by no means the only costly mistake people make when it comes to confusing a beneficiary designation with a will. Here are six others you’ll want to avoid:

Not naming a beneficiary.

If you don’t name anyone, your estate becomes the beneficiary. That means the asset could be subject to a lengthy, expensive and cumbersome probate process – and people who wind up with the asset might not be the ones you’d have preferred.

Failure to list contingent beneficiaries.

If your beneficiary dies first and you haven’t named a contingent (or secondary) beneficiary, it’s the same as having no beneficiary. If you and your spouse die at the same time (say, in an accident) and you’ve not named the kids as contingent heirs, your estates go into probate. Naming a contingent beneficiary has another advantage, too: If the primary beneficiary doesn’t want the asset for some reason (perhaps because of tax implications), he or she can waive rights to it, allowing the money to pass to the contingent beneficiary. Many surviving spouses do this for their children, and it can be a smart way to avoid or reduce taxes. But if you fail to name a contingent beneficiary, this opportunity is lost.

Lack of specifics.

Simply listing “my children” as your beneficiaries can be a problem, especially in a blended family. Many states don’t recognize stepchildren when the word “children” is used. Or some family member with whom you’ve lost contact and with whom you don’t intend to share your assets could suddenly turn up and try to claim all or part of the estate. Finally, what happens if one child predeceases you? Unless you get specific, that child’s share will go to your other children instead of to that child’s children. Unless it’s your intent to disinherit some of your children or grandchildren, you need to be more specific with each beneficiary designation.

Using shortcuts.

If you have three children and you want all three to receive an asset, you need to name all three as beneficiaries. Too often, we find that a client has listed only one child, believing that this person will then give the others their shares. Big mistake. Even assuming the child is so inclined (legally, he or she doesn’t have to!), the IRS might interfere by levying taxes on the amounts redistributed. Shortcuts are never a good idea with legal documents.

Missing beneficiary designation forms.

Let’s say your forms are on file with a custodial company but that firm is acquired by another in a merger. Records are sometimes lost or destroyed in that situation. Without a verifiable form to prove beneficiary status, the default provision of the plan applies, which often is “spouse first, if living; then the estate.” Keep copies of your beneficiary forms in a safe deposit box and make sure your financial advisor, estate attorney and executor have copies.

Not considering the financial or emotional readiness of beneficiaries.

Your heirs will get the money from your IRAs, retirement accounts, life insurance and annuities almost immediately upon your death, with no restrictions. If this worries you, consider naming a trust as beneficiary; then you can place limits on when and how the money is to be used.

You’re devoting a lifetime to accumulating assets. Make sure their disposition is managed the way you want, or your efforts could be for naught. If you have any questions about your current accounts’ beneficiary designations, contact your financial advisor and continue to review them as part of your routine meetings.

Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.

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