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Understanding the Importance of Beneficiary Designations in Estate Planning

Choosing your designated beneficiaries is a crucial part of the estate planning process. Learn the ins and outs of beneficiary designation here.

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Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

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Beneficiary designation is an important aspect of the estate planning process, but it’s actually something that’s dealt with outside of your actual estate plan. Further, if your designated beneficiaries don’t match up with the provisions in your estate plan, it could lead to some trouble. Keep reading to find out everything you need to know about beneficiary designation, and how it relates to estate planning, and how to avoid any conflict between these two types of documents.

What is Beneficiary Designation?

A beneficiary designation is the act of naming the person who will inherit an asset in the event of the account owner’s passing. Some common examples include life insurance policies and retirement accounts. When the account owner passes away, their assets are then transferred to the beneficiary that they designated.

It’s also possible to designate your estate as the beneficiary. Instead of transferring the asset to a person, the asset is transferred to the estate. Then, the asset is distributed according to the provisions in your Trust or Will.

It’s worth noting that the SECURE act was passed in December 2019 under the Trump Administration. It created new rules regarding required withdrawal amounts from inherited retirement accounts. It should be noted that the term ‘designated beneficiary’ is newly defined as a living person who doesn’t fall into one of the five categories below:

  • Surviving spouse

  • Child under the age of 18

  • Individual with a disability

  • Individual who is chronically ill

  • Individual within 10 years of age of the deceased

As a result of the SECURE act, any person who falls into one of the above five categories is an ‘eligible designated beneficiary.’ For the purpose of the article, ‘designated beneficiary’ will also include eligible designated beneficiaries.

The main thing to note about eligible designated beneficiaries is that they have added benefits relative to designated beneficiaries, such as greater flexibility in withdrawing funds from their inherited assets. This highlights how important it is to do your research before doing your beneficiary designations. 

Are There Different Beneficiary Designation Types?

There are different types of beneficiary designations, and the number of types increased with the recent SECURE act. So far, we discussed the difference between an eligible designated beneficiary and designated beneficiary. There are a few more beneficiary designation categories to keep in mind when managing your assets:

  • Eligible Designated Beneficiary (EDB): EDBs fall into one of five categories as defined by the 2019 SECURE Act. These beneficiaries have certain advantages over other beneficiary types.

  • Designated Beneficiary (DB): A DB is any living person who was named as a beneficiary, but does not fall into one of the five EDB categories.

  • Not Designated Beneficiary (NDB): A non-living beneficiary is considered non designated. This can be charities, Estates, and Trusts.

  • Primary Beneficiary: The named beneficiary is first in line to receive benefits, and are thus the primary beneficiary.

  • Contingent Beneficiary: A Will may outline a contingent person who may receive benefits in the case that the primary beneficiary is deceased, or cannot or will not accept the assets.

  • Secondary Beneficiary: This term is used interchangeably with the term contingent beneficiary.

An important thing to note here is that a named beneficiary isn’t always a living person. Per the definition of an NDB (not designated beneficiary), you can arrange to have your assets transferred to your estate. In this case, the Will will include instructions for who will inherit which assets, how much, and so on.

Does a Designated Beneficiary Override a Will?

In general, a designated beneficiary will take precedence over a Will. This is because the entity that manages the account, such as a bank or life insurance company, will transfer the asset to the beneficiary who was named for that specific account. Sometimes, this won’t line up with instructions that were left in a Will.

That’s why it’s so important to make sure that your Will and beneficiary designation won’t cause any conflict. You’ll want to ensure that the provisions in Will are coordinated with the named beneficiaries of those asset-holding accounts or policies. If not, the instructions in your Will may not be executed according to plan. 

For those wanting to consolidate and avoid confusion, it’s possible to name your Estate as the beneficiary of your assets. Your Will would then name the specific individuals that these assets should be distributed to, in what proportion, and any other applicable provisions.

To learn more, be sure to check out “Beneficiary Designation vs. Will,” in which we break down the differences between these two types of documentation in detail.

Why Set Up a Designated Beneficiary? 

Have you made a beneficiary designation on your retirement accounts, savings accounts, and life insurance policy? Not doing so could be a mistake. When someone doesn’t set up a designated beneficiary, your estate automatically becomes the beneficiary. This could be subject to a long, expensive, and burdensome probate process.

When designating your beneficiary, be sure to name a contingent beneficiary in case the primary beneficiary is predeceased. It’s also helpful to be as specific as you can. Designate your beneficiaries by name (instead of “my kids”), and be sure to specify how that particular asset will be divided and distributed.

How Do You Designate a Beneficiary?

To designate a beneficiary, you’ll need to follow the instructions provided by the company holding the asset. At times, it will be an easy process, such as simply filling out a web form provided online. Most often, the company will ask you to name a beneficiary when you first open the account. Just be sure to have the full legal name and contact information of your desired beneficiary or beneficiaries.

Keep in mind that designated beneficiaries become active the moment you pass away, and can inadvertently override any provisions about asset inheritance in your Will. It’s helpful to use online tools that will make it easier for you to review and update your estate planning and beneficiary designation documentation.

At Trust & Will, we offer seamless estate planning services to help you get started. Any time you designate a beneficiary for a newly acquired asset, you can simply log on to our online portal to review your estate planning documents. Of course, you can make updates when needed.

Beneficiary designation very much sounds like an estate planning term. Although it’s closely related, in this case it’s slightly different. Designating a beneficiary refers to the process of naming an individual who will receive an asset upon your passing. This is done for each individual asset, such as a life insurance policy, through the company that holds the asset. This means that you’ll need to repeat the process with the different entities that hold your assets. Estate planning, however, does play a big role. That’s because the beneficiary designation of an asset overrides your Will by default, if it does not match with the provisions of your estate plan. This is yet another reason why you should make a habit out of reviewing and updating your estate plan regularly. Is there a question here we didn’t answer? Reach out to us today or Chat with a live member support representative!

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