What are Beneficiary Designations?

A designated beneficiary is in simplest terms, the nominating of an individual to receive certain property after you die. Generally, a nominated party can be removed or changed during your lifetime. Common areas where you will see beneficiary designations are transfer on death or pay on death accounts, life insurance contracts, and retirement accounts. These types of assets will typically require you to designate a beneficiary when you open an account or sign a contract. The company or account holder will then distribute the asset to your designated beneficiary upon your death. Beneficiary designations are an important aspect to your estate plan for this reason and should be reviewed periodically to ensure it aligns with your wishes. Because the asset already has instructions as to who to transfer to upon your death, your Will or Trust will not control any distributions despite who you nominated in those documents.

Does designating a beneficiary avoid probate?

Many beneficiary designations for assets such as retirement accounts and life insurance do avoid probate. However, it is still extremely important to consult an attorney and/or an experienced accountant to ensure that the beneficiary you nominate can receive the asset without undue hassle or tax consequences. When it comes to retirement accounts especially, there are many provisions in the tax code that can greatly increase the tax burden when nominating certain people, or your trust as the beneficiary. In most situations, it is not recommended to designate your trust as the beneficiary to your retirement accounts. Unless there are specific reasons for doing so, and the trust is properly set up to receive these assets, a large portion of the inheritance may be lost to taxes. There are other considerations as well, such as transfers to minors which must be taken into consideration when drafting your estate plan. Every situation is different and can benefit from an approach unique to your situation. You should consult an expert and carefully weigh the pros and cons when determining who to designate as a beneficiary.

Can my trust be a designated beneficiary?

Your trust may absolutely be a designate beneficiary. In fact, it is very common to designate a trust as the “contingent beneficiary” should the first designated beneficiary die before you do. The reason that a trust should be named as the contingent beneficiary is to avoid the asset from transferring to your estate, thus potentially raising the value of your probate estate beyond the threshold requiring a formal probate. Depending on your specific situation, it can also be a common estate planning method of providing liquid assets (cash money) to a trust for operating costs by naming the trust as the beneficiary of a life insurance policy. This ensures that your trustee and attorney can be paid from the trust assets for the Trust Administration.

What if there is no designated beneficiary?

If there is no beneficiary listed, there are a couple of problems you may encounter. For one, if there is no designated beneficiary, then the asset will (eventually) become a part of your probate estate. Your probate estate is controlled by your Will, and can be subject to a formal probate if the asset is high value. If your estate becomes the beneficiary and is subject to probate, then it also brings with it the unfortunate consequence of requiring all other assets subject to your will to undergo probate. These assets which, so long as the value was under the threshold, would have passed to your beneficiaries or to your trust without the need for a probate proceeding.

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