Can Designating Beneficiaries Undermine My Plan?

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Beneficiary designations can lead to problems in your estate plan.

Some assets pass through beneficiary designations by their very nature, like life insurance, annuities, and retirement accounts.

For this reason, this method of asset transfer is particularly important when it comes to your estate planning.

If used properly in conjunction within a comprehensive estate plan, these are spectacular tools.

According to a recent The National Law Review article titled “Overuse of Beneficiary Designations: How They Can Derail a Client’s Estate Plan,” beneficiary designations can also have unintended consequences.

Beneficiaries are not always the best estate planning option.
Designating beneficiaries can undermine your estate plan.

As noted above, certain accounts like life insurance, annuities, and retirement accounts have beneficiary designations.

When opening one of these policies or accounts, you name beneficiaries as part of the initial paperwork.

Often, people forget these designations until they review them as part of their estate plan.

The designations can be tailored at this time to pass to the intended heir directly or through a trust.

Beneficiary designations can help you keep these assets out of probate.

Other assets can also be passed through beneficiary designations.

The non-probate transfer statutes in both Kansas and Missouri permit transfer over virtually any asset by “pay on death” or “transfer on death” arrangements. These include CDs, savings account, investment accounts, U.S. Savings Bonds, and even real estate.

If you neglect to take your various beneficiary designation arrangements into account in your estate planing, you could undermine your estate plan.

How so?

You may lose tax saving strategies.

Your assets may not be able to fund a generation-skipping trust, marital trust, or credit shelter trust.

Consequently, the tax planning in your estate plan may not work as intended.

You may unintentionally exclude heirs.

If you choose to pass most or all of your assets to beneficiaries directly, this may leave nothing to those who would otherwise inherit through your trust or your will.

Yikes!

You may lose creditor protection or asset management.

Often times estate plans use trust arrangements to avoid claims from creditors, especially for beneficiaries.

If the assets pass to heirs directly rather than through a trust, these protections are lost.

You could create estate administration issues.

If everything passes directly to beneficiaries, the executor may be left with nothing in the estate to pay off an estate or other taxes.

In this case, the tax may be levied against beneficiaries to pay full or partial amounts of the taxes.

How can you keep from making a costly mistake?

Work with an experienced estate planning attorney before making a non-retirement account a “pay on death” or “transfer on death” account.

With the help of an attorney, you can create a plan to properly align all of your beneficiary designations with your estate planning goals.

Reference: The National Law Review (Feb. 28, 2020) “Overuse of Beneficiary Designations: How They Can Derail a Client’s Estate Plan”