Understanding Beneficiary Designations

One of the most important decisions you make is setting up a financial plan to protect your loved ones after death. Beneficiary designations are legally binding directives that coordinate with your overall estate plan. These designations pass through to your beneficiaries upon death without probate or trust agreements. In addition to loved ones, beneficiaries can be charities, organizations, or trusts. It is important to understand that a beneficiary designation is a type of contract. Once an insurance policy or financial account is assigned to a beneficiary, it is paid out that way, even when contradicted by the language of a will or trust.

Revising a Will or Trust Does Not Affect a Beneficiary Designation

Typically, a will or a trust does not supersede a beneficiary designation. Assets with beneficiary designations are excluded from the estate. Therefore, you must review your assigned beneficiaries regularly and immediately after significant life events. Many court battles have ensued because of outdated beneficiary designations. A divorce, an adoption, a child’s birth, or a loved one’s death are all triggers to review and revise your beneficiary designations to ensure that your assets are given to the right person or entity.

Examples of Assets that may be assigned to a Beneficiary are:
  • Life Insurance
  • Annuities
  • Pension Plans
  • 401ks
  • IRAs
  • Savings and Checking Accounts
  • Certificates of Deposit
Irrevocable, Revocable, and Contingent Beneficiaries: What are the Differences?
  • Irrevocable beneficiaries must be appointed with careful thought and consideration, as they have full rights to your insurance proceeds, retirement assets, or other funds. It is complicated to revoke these beneficiaries and sometimes impossible, even if you want to make changes.
  • Revocable beneficiaries are most commonly used, as they are the most flexible option. The fund or policy owner may revoke or change these beneficiaries during their lifetime, usually by completing a simple document.
  • Contingent beneficiaries are entitled to your insurance proceeds, retirement assets, or other funds if your beneficiary predeceases you or cannot be located. Often, appointing contingent beneficiaries is overlooked, complicating the closing of an estate.

What are the Pitfalls?

Beneficiary designations have certain hidden pitfalls. One of the most common mistakes is when parents name their minor children as beneficiaries on their financial accounts. If the parents were to die while the child is a minor, significant issues would arise. A trustee would need to be appointed to act on behalf of the minor children until they are of legal age. Another downfall is that people forget to update their beneficiaries on their accounts. Also, sometimes individuals will name trusts as the beneficiary of an IRA or retirement plan without the proper underlying planning.

C.J. Hilliard Law, P.A. will Follow You through Life’s Changes

Beneficiary designations are not a substitute for a well-drafted estate plan but should be part of the consideration. It is essential to seek professional advice regarding beneficiary designations to provide you with the desired benefit.

At C.J. Hilliard Law, P.A., we are experienced with all aspects of estate planning and are ready to help you plan for the future. We are located in Winter Garden, Florida, and represent clients throughout Orlando and Central Florida. Contact our law firm at (407) 656-1576 to get answers to your questions and secure your legacy.

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