Best Practices to Reassess your Beneficiary Designations

While a will or revocable trust is crucial for your estate plan, it's important to recognize that a significant portion of your wealth may not be distributed through these traditional methods. Instead, it may be transferred to your loved ones through beneficiary designations. These "nonprobate assets" can include IRAs, employer-sponsored retirement accounts, life insurance policies, and certain bank or brokerage accounts.

Unfortunately, many individuals designate a beneficiary when they first acquire a nonprobate asset and then forget about it. However, over time, these beneficiary designations can become inappropriate or outdated due to changes in life circumstances, estate planning goals, or tax laws. Consequently, it is highly advisable to periodically review your beneficiary designations and update them as necessary.

During this review, it is essential to consider the following best practices and potential pitfalls:

1. Name a primary beneficiary and at least one contingent beneficiary. Failing to designate a contingent beneficiary for an asset can have unintended consequences if the primary beneficiary passes away before you do and you haven't named another beneficiary. In such cases, the asset may end up in your general estate and may not be distributed as you initially intended. Additionally, certain assets, such as retirement accounts, provide protection against creditors. However, this protection can be lost if these assets are transferred to your estate. To have control over the final distribution of your wealth and safeguard it from creditors, it is crucial to name both primary and contingent beneficiaries and avoid designating your estate as a beneficiary.
 

2. Update beneficiaries to reflect changing circumstances. Designating a beneficiary should not be treated as a "set it and forget it" activity. Neglecting to update beneficiary designations to align with changing circumstances increases the risk of unintentionally leaving assets to someone you did not intend to benefit, such as an ex-spouse. It is especially important to update your designation if the primary beneficiary passes away, particularly if there is no contingent beneficiary or if the contingent beneficiary is a minor. For instance, suppose you name your spouse as the primary beneficiary of a life insurance policy and your minor child as the contingent beneficiary. If your spouse dies while your child is still a minor, it is advisable to name a new primary beneficiary to avoid complications associated with leaving assets to a minor, such as court-appointed guardianship.
 

3. Consider the impact on government benefits. If a loved one relies on Medicaid or other government benefits, designating them as the primary beneficiary of a retirement account or other assets may render them ineligible for those benefits. In such cases, establishing a special needs trust for your loved one and naming the trust as the beneficiary may be a better approach.
 

4. Stay informed about tax developments. Failing to update your estate plan in accordance with changing tax laws can derail your intentions. For example, the SECURE Act, passed in late 2019, brought about changes in the rules for inherited IRAs.

To avoid unintended consequences and ensure that your beneficiary designations align with your overall estate planning goals, it is essential to regularly review them. If you have any questions, we would be delighted to assist you.