A beneficiary designation is when you name a specific person to receive your assets when you pass away. Retirement accounts, annuities, life insurance, pay on death accounts, all require beneficiary designations. You make these designations outside of traditional estate planning documents, such as a Will or trust.
Beneficiary designations can be very helpful because they allow assets to pass to beneficiaries automatically at your death without needing to go through a formal estate administration process. The named beneficiary does not have any rights to the money until you die, so you are free to spend it all or to change the beneficiary. When you die, the beneficiary simply has to present your death certificate to the financial institution and identification, and the funds are released.
Using beneficiary designations can be a simple process and often works seamlessly, but there can be significant and unintended consequences. The most important thing to remember is that beneficiary designations override designations made in a Will or trust. For example, if you designated only one of your children on an account because you could only remember his or her social security number, and you think you can fix it by designating all of your children as beneficiaries of that account in your Will, the end result is that the one child who is designated at the financial institution will receive the entire account.
Divorce can also have unintended consequences regarding beneficiary designations. There are quite a few default laws in Oregon that automatically prevent an ex-spouse from receiving your estate assets when you die under the assumption that you probably do not want your ex-spouse to be entitled to your assets. There is no such default law regarding beneficiary designations. If you get divorced and forget to remove your ex-spouse from your beneficiary designations, he or she will receive the funds in these accounts when you die.
It is also important to use clear language when designating beneficiaries. If it is ambiguous or confusing, the beneficiaries will suffer the consequences. It can lead to costly conflicts among the beneficiaries, which often require legal action to resolve the issues. Confusion can arise when specific dollar amounts are used instead of percentages, or when designating more than one beneficiary. If you would like to designate multiple beneficiaries, it would be a good idea to take the beneficiary designation form to an estate planning attorney to help you draft the correct language to achieve your wishes.
The bottom line is that beneficiary designations can be a helpful estate planning tool, but you must use them with careful consideration. You should review them every few years to make sure they still reflect your wishes. It is a good idea to have a list of all your accounts where there is a beneficiary designation. If your marital situation changes, update your beneficiary designations immediately. And if you have any questions, contact an estate planning attorney. Don’t have an estate planning attorney? Contact us. We’re happy to help.