Hear me out. I’m going to admit that most lawyers get it wrong here, and I used to be one of them. I used to do exactly what I would absolutely cringe at doing now.
It’s really amazing how much our clients have taught me over the last five years – they’ve brought to us every estate planning scenario imaginable, and we’ve had a chance to help them go on vacation without worrying, or sleep better at night, or go into childbirth or surgery with peace of mind; and we would like to do the same for you.
So here’s what you need to know: Your beneficiary designations override your will.
I realize “beneficiary designations” is not the most popular topic you could read about. But you already have beneficiary designations whether you know it or not and it’s your children or other people close to you who will either be greatly benefited – or greatly damaged – by your beneficiary designations.
You have beneficiaries already designated if you own anything like:
- Life insurance policies
- Retirement accounts
How do I know this? Because when you set up your life insurance policy or retirement account, the application you filled out asked you to name your beneficiaries.
And if you’ve done your Last Will or if you plan to, the reality is that your beneficiary designations override your will.
This means that if you’ve named a minor child as the beneficiary of your life insurance policy or retirement account, those funds will be paid to your minor child directly but only once a probate judge (a stranger) decides who handles their money until your child is 18. A judge can choose anyone they want – not just someone who you’re related to or who you trust.
And this happens REGARDLESS of what your Last Will says, because your beneficiary designation OVERRIDES your Last Will.
In other words, your will may say that assets left to your minor children are managed by your mom until your children reach age 25 – but when a minor child is named as beneficiary of an asset, your will does NOT apply to this asset, a judge does NOT have to choose your mom, and your child gets EVERYTHING at 18 (not 25). Sounds crazy, right?
Hello, uncertainty and fees!
I once helped a mom with two young children in a case where her ex-husband (the children’s father) left everything to his two children, but it was all through beneficiary designations. But he didn’t clarify who was in charge of the minor children’s inheritance. And while this may sound crazy, the law says the surviving mom was not automatically the one in charge. She had to go to court, make her case about why she was responsible enough for the job, and then wait for a judge to decide. And she had to do this in two separate court proceedings because there is a separate court proceeding for each child. Now that she has been appointed, she has to check in with the court every single year until each child turns 18, telling the court exactly how the inheritance has been spent over the last year.
If her ex-husband had known that beneficiary designations override his will, maybe he would have made it a lot easier on his children.
It was a really sad situation that could have been avoided.
And this doesn’t happen just with minor children; something unintended can happen to adult children as well.
I once helped two adult children where their mom had set up her will (not drafted by us) to go 50/50 to her children, but for her daughter she set up a special needs trust in her will, meaning that her daughter wouldn’t be personally in charge of her own money due to a disability. Her mom thought the special needs trust in her will would take care of her daughter. And she was right, it would have – except that the mom didn’t realize that EVERY single asset she owned already named her two children as 50/50 beneficiaries and that this trumped her will. Literally not one single asset went into the special needs trust she set up for her daughter because the beneficiary designations trumped her will, and instead her daughter received her half outright without the special needs protection – exactly how her mom didn’t want it to happen.
And that brings me back to my first point that I used to be one of those lawyers who didn’t discuss beneficiary designations with my estate planning clients. I would simply draft a will because someone asked me to. They had always heard “you need a will” so they got one. I didn’t have enough experience to ask about any of their beneficiary designations.
Today, I would never skip that part with you.
If I were to draft a will or trust for you that contains well thought-out provisions for who is in charge of money left to your children or other heirs but I skipped over your beneficiary designations, your estate plan would not be worth a single dime. Whether you paid $200 or $20,000 for your estate plan, it literally wouldn’t be worth anything. Your children would have money paid out to them directly, forcing your children into a court proceeding that your estate plan was supposed to avoid.
Sometimes when my clients come in, they have their parents, siblings, or even exes named as beneficiaries even though they’re now married and have children. After you pass away, there is absolutely nothing that can be done to change who receives your life insurance and retirement accounts if you haven’t updated your beneficiary designations. No one can force a named beneficiary to not receive the funds, no matter what life changes have happened in the meantime.
So you can see how important your beneficiary designations are and why simply printing out and signing a cookie-cutter will isn’t gonna cut it.
Here’s what you can do today to avoid this:
- Review your current beneficiary designations ASAP. If you don’t have a copy of your beneficiary designations, call your financial institution to get a copy.
- If anyone is named as beneficiary who you wouldn’t want to be the recipient of that asset, update your beneficiary designations immediately.
- If you have anyone or anything you care about and want to protect, register for our free estate planning talk or webinar to learn more about beneficiary designations and everything else that goes into your estate plan.
- Get your estate plan done if what you learn at our free talk or webinar is helpful.