Often beneficiary designations are used for assets like retirement plans, life insurance policies, and bank accounts. You can even use a beneficiary designation on vehicles and a transfer on death (TOD) for real estate. 

When you pass away, those assets will go to the individuals, trusts, and/or charities you chose on your beneficiary designations.

Although, there are situations where that would not happen: 

  • Beneficiary is a minor 
    The court likely will need to appoint a guardian to receive and control the money on behalf of the minor before a financial institution or life insurance company will pay the funds. They typically require proof of a court-supervised guardianship, so they don’t risk liability.
  • Beneficiary is incapacitated
    Similarly to naming a minor, most financial institutions or life insurance companies won’t willingly pay to an incapacitated person and may require proof of a court-supervised guardianship.
  • Beneficiary is “my estate”
    (This is different than naming your trust) The account’s funds will have to go through probate so the court can rule who “my estate” is and distribute the funds with your other assets. 
  • Beneficiary is deceased
    If you have not named a secondary beneficiary, the funds will pass according to the default terms of the beneficiary designation forms. If the default leaves the funds to your estate, then they will go through probate to be distributed with your other assets.

There are also times when you may not want to name someone as the beneficiary:

  • Beneficiary receives government benefits
    If a loved one requires special care, you could unintentionally endanger their ability to continue receiving these benefits. Many programs providing government benefits limit income or assets owned to a predetermined amount. 
  • Beneficiary isn’t good with money
    Maybe this person spends irresponsibly, is easily influenced by a spouse or friend, or makes bad investment choices. Maybe they’re going through a divorce or have creditors trying to collect that money. There are many scenarios where this money you worked so hard for seemingly disappears, because the beneficiary isn’t good with money.
  • Beneficiary doesn’t follow your wishes
    Even if you want the beneficiary to use the money for X or hold it until Y, you have no guarantee they will follow your wishes. Seeing the money sitting in their bank account may be too tempting. Say they do follow your wishes, your beneficiary may need to use a portion of the beneficiary’s estate and gift tax exemption amount when making distributions to the intended final recipient.
  • Multiple beneficiaries
    Because using beneficiary designations is a way to bypass probate, it can be a confusing and frustrating situation when multiple beneficiaries now own – and have to agree on how to proceed with – an account or property together. We have an example of four siblings inheriting their parent’s home in this episode of our podcast “Protecting Your Family’s Future”.
  • All assets avoid probate
    Your estate still has bills that need to be paid: funeral expenses, final medical expenses, taxes, etc. If all of your assets were passed along directly using beneficiary designations (there’s not a trust with a trustee to manage administration of the estate), then no one is legally responsible to settle these bills. This can cause quarrels between beneficiaries when it comes time to pay the estate’s bills. In this situation, using beneficiary designations creates more problems than it solves. To avoid probate and family fights, consider a living trust.

While using a beneficiary designation is a useful tool, it needs to coordinate with your overall estate plan. We often recommend naming a trust as a beneficiary to prevent the problems described above. Having a comprehensive plan to manage all your assets can help ensure each beneficiary will receive precisely what you intended.  

We know estate planning can be complex. That’s why we want to help you create the best estate plan for you! Meet with one of our attorneys for a no-cost initial consultation; call 419-872-7670 or request an appointment through our website