Why you should never overlook beneficiary designations

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Learn how by consulting with your advisors you can avoid potentially costly mistakes as you designate the beneficiaries of your non-core estate assets

Ari Messenger, Senior Wealth Planner, Wealth and Investment Management
Ari Messenger, Senior Wealth Planner,
Wealth and Investment Management

One of the easiest yet often overlooked pieces of an estate plan is the beneficiary designation. While your will or trust controls the disposition of many of your assets, the distribution of assets such as life insurance policies, annuities, IRAs, retirement plans, and other employee benefit plans upon your death will instead be dictated by your beneficiary designation.  This makes beneficiary designation forms just as important as the core documents of your estate plan.

Pick the right beneficiary and designate them correctly

The first step is to determine which of your assets have beneficiary designation forms. Then, decide who you want to name as the beneficiary of each asset. It is a good idea to pick at least one successor in case your designated beneficiary does not survive you.

Though it may be possible to correct a broken beneficiary designation after death, it can also be expensive and time consuming.

Next, make certain you are completing the form properly – each financial institution will have their own form and the requirements for each form will vary. For example, the custodian of a retirement  plan may require a spouse’s signature, where a life insurance carrier may not. Similarly, some institutions may require a notarized original, while others may allow you to complete the designation online.

Though it may be possible to correct a broken beneficiary designation after death, it can also be expensive and time consuming.

Consider one situation a colleague of mine encountered. His client had significant assets in his retirement account, but failed to properly complete the beneficiary designation form naming his wife. Instead of the assets being distributed directly to her following his death, she was forced to engage legal counsel to ensure that she received the proceeds that her husband had intended for her.

In this instance, a form that may have taken my colleague’s client a few minutes to properly complete could have saved his wife significant amounts of time and money in legal fees.

Don’t keep your tax advisors in the dark

As easy as a beneficiary form is for you to complete on your own (after reading the instructions), it is just as easy for your designation to have an unintended tax consequence. It is always a good idea to review your beneficiary designations with your tax advisor. This is particularly important where you may want to designate a trust or estate as a beneficiary, for instance when the intended beneficiary is a minor.

Remember that your beneficiary designation forms are one piece in the larger estate plan puzzle you have put together. Because these forms operate outside of your will or trust, it is possible that an intent to evenly divide all of your assets among your descendants is upset by a designation that is done improperly.

Just as a qualified tax advisor can help to prevent unintended consequences, they can help you identify opportunities. For instance, if you wish to name a tax exempt organization as a beneficiary of your estate, it may work better to name a charity as the beneficiary of a normally taxable asset, such as a qualified retirement plan or nonqualified stock options, and allow other beneficiaries to receive income tax free assets such as an insurance benefit.

Revisit your designations often

As with all documents in your estate plan, it is a good idea to review your beneficiary designations regularly so that you can change them as necessary. Life events such as a birth, death, marriage, or divorce without an update in your forms may result in a transfer of your assets to someone unintended or leave out a person you would like to include.

Not only is it important to update these documents for major life events, but changes in the law may necessitate a change.

A client recently shared with me that he hoped to pass his largest asset, a qualified retirement plan from his prior employer, to his 30 year old niece.  He had intentionally withdrawn only the Required Minimum Distributions so that his niece would be able to “stretch out” the remaining distributions over her life: However, under the SECURE Act of 2019, his niece is no longer allowed to use a life-expectancy payout and only has 10 years to fully distribute the plan’s assets. The client needed to revisit his plan and determine what distribution options were available to his niece under the new act.

Key takeaways

Make sure you take the time to thoughtfully fill out beneficiary designations for all assets that fall outside your core estate plan. Also, consider regularly discussing your plans with your tax and legal advisors and wealth planning specialists. Your advisors can help you avoid expensive mistakes and suggest opportunities to better reflect your ultimate wishes for your estate.

Wells Fargo & Company and its affiliates do not provide legal or tax advice. Wells Fargo Advisors is not a legal or tax advisor. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.