Updating Your Plan Part 3: Beneficiary Designations

This is a bonus part of a series of articles on updating your plan. The first article examined the importance of updating your Powers of Attorney, both Financial and Medical. The second part of the series looked at the importance of updating your primary estate planning document, such as your Trust or Will. Together, these documents are the keystone in even the most basic estate plan and it’s important to keep them up-to-date. However, it’s also important to make sure beneficiary designations are up-to-date.

A beneficiary designation instructs where the asset goes upon your death. Some important assets which transfer by beneficiary designation are IRAs, 401(k)s, and life insurance. These assets could be a large part of your overall assets, so it’s important to make sure those beneficiary designations complement your overall estate plan. These designations control the disposition of the asset, notwithstanding the fact that your Will or Trust has terms that conflict with it. For example, let’s say your Will or Trust leaves everything to your two children. However, you have an asset, like an IRA, which designates your mother as the beneficiary. Perhaps the designation predates the birth of your children. In that scenario, your IRA would go to your mother and not to your two children. That’s why it’s important to check beneficiary designations on assets that have them.

Many other assets, such as a bank account, brokerage account, or a vehicle, could have a “POD” (Pay on Death) or “TOD” (Transfer on Death) designation. Like a beneficiary designation, a POD or TOD designation supersedes the instructions which you’ve laid out in the rest of your estate plan, such as in your Will or Trust.

There’s nothing inherently wrong with TOD, POD, or beneficiary designations. When used properly, they can be a simple, effective part of your overall plan. However, it’s important to coordinate your entire estate plan and consider the impact of each part on the other.

It’s easy for a plan to become inconsistent with your wishes when you use beneficiary designations, TOD, or POD because the designations are fixed even as asset values change. For example, let’s say Mary intends to leave her assets to her three children equally. Mary has a small brokerage account with a POD to one of her children, Betty. Mary doesn’t think anything of this, because there’s language in her Trust which considers what Betty receives from the brokerage account. However, when the brokerage account going to Betty skyrockets in value, Mary’s Trust can no longer make sufficient adjustments because it doesn’t control sufficient assets to balance out the brokerage account going directly to Betty.

However you choose to leave your assets, it’s important you consider changes in your wishes, changes in asset values, etc. If you want your wishes carried out, it’s important to keep your entire plan up-to-date and consider how changes in asset values might have a substantial impact on your plan.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com