How Important Are Those Beneficiary Designation Forms?

“It’s all about the assets” can be a very important phrase when ensuring your assets are connected with your estate plan. Although creating the estate plan in the first place is still the most important step, making sure your assets are properly funded to that plan run a close second.

Unfortunately, there are a few key beneficiary designations you just can’t afford to forget.

Whether someone creates a trust-based plan or a will-based plan, many times people assume that after their plan is created all their assets will just follow their plan. This is a common misconception that can be an expensive mistake.

The best example of this is the simple beneficiary designations on retirement assets such as an IRA, 401(k) or 403(b) account. These retirement asset accounts will pass to the people or entities designated as beneficiaries on the account.

Yes, those confusing forms you filled out long ago when you opened the account are still very, very important. Many people don’t give much thought to these forms, or once they complete their updated estate plan they fail to update these account beneficiaries.

Too often we find those beneficiaries are out-of-date and we are too late in the planning process. This can lead to extra stress, emotional pain, and financial loss. Here are some common problems we encounter with beneficiary designations:

  • The beneficiary is no longer living and no alternate beneficiary has been named.
  • The deceased never completed a beneficiary designation form for a certain asset.
  • We find the beneficiary is an ex-spouse, like in the case of a life insurance policy.

Another common problem we find is the beneficiary can no longer receive an inheritance because they are now receiving government benefits (i.e. Medicaid), so the receipt of an inheritance will jeopardize their continued benefits.

It’s important to remember that those confusing forms can be very, very important for the success of your plan!

5 Types of Assets That Commonly Have Beneficiary Designations

We commonly find beneficiaries designated on the following types of assets, and these beneficiary designations can supersede the intent of your estate plan. For example, the beneficiary designations will take priority over what your Last Will and Testament says if they are in conflict.

  1. Bank accounts with payable-on-death (POD) designation
  2. Investment accounts with a transfer-on-death (TOD) designation
  3. Retirement accounts like 401(k)s,IRAs, etc.
  4. Life insurance policies
  5. Annuities

It is absolutely critical to be sure the ownership and beneficiary designations on your assets are properly aligned with your estate plan. This is commonly known as the funding of your estate plan.

Funding of Assets – What’s Involved?

When it comes to funding of assets, we work with our trust-based plan clients to:

  • Understand their asset inventory
  • Document steps we need to take to properly fund each asset
  • Provide supplemental funding letter where needed, and/or
  • Work with the client’s financial advisor to properly fund their assets to their trust

When our clients provide their asset inventory, then we create a funding schedule to document the asset funding steps with their estate plan. This funding schedule provides the next steps to take for each asset. This funding schedule summary can be super important when there is an unexpected death, or a sudden mental disability (i.e. stroke).

Funding of Your Trust – How Often Is This Updated?

So is this funding of the trust a one-time event? It is certainly not. People’s assets change all the time, beneficiaries may evolve, circumstances change, and many other life events can modify the initial funding plans.

So, the funding of your trust is an ongoing process, but the initial funding of the trust is usually the most comprehensive.

Common life events that can modify the initial funding of a trust include:

  • Marriage or divorce
  • Births
  • Death or disability of a family member
  • Job changes impacting retirement or insurance assets
  • Long-term care needs of an individual
  • Buying/selling homes and/or moving
  • Disability or government benefits for a beneficiary

We go through all this funding discussion with our estate planning clients in the development of their estate plan. We are dependent on them to provide an accurate summary of their asset inventory, and our focus is on the ownership and/or beneficiaries of these assets. Although the value of the assets remain important, under today’s estate tax laws this is perhaps less important as compared to previous years.

The funding of your assets to the trust, the finalizing of these key beneficiary designations, and the ongoing management of this process is a critical part of any estate plan. If you have questions about the funding of your assets to your estate plan, or any of the ongoing changes to this funding, please give us a call at 913-345-2323.