Importance of Beneficiary Designations
If you own a life insurance policy, annuity contract or individual retirement account, or are a participant in a company sponsored retirement plan (collectively “Accounts”), you are probably familiar with the term beneficiary designations. Beneficiary designations allow an individual to direct assets from an Account directly to a named beneficiary upon the death of the Account owner. Assets that pass upon death by beneficiary designation avoid probate and are afforded a measure of privacy that is not otherwise available if there is no beneficiary designated. As a result, beneficiary designations are a preferred way to transfer assets at death. They are easy to make and easy to change. Even so, you would be surprised at the number of people who forget to make beneficiary designations before they pass away.
Let me elaborate on what happens if there is no beneficiary chosen for an Account. If you do not name a beneficiary for an Account upon death, the Account proceeds will pass to your estate and become subject to the jurisdiction of the probate court. If this happens, you may create a situation where a probate estate must be opened. This will lead to costs associated with administrating an estate and delay the time at which the Account proceeds will be distributed to the beneficiaries of the estate. Compare this outcome to one where a beneficiary has been named – in that case the assets pass directly to the named beneficiary and there is no need to open an estate. Even if an estate is already opened, not naming a beneficiary will cause the estate to incur increased estate costs as a result of the estate having to probate more assets.
Moreover and in addition to the increased costs and delayed distributions to beneficiaries associated with probating an estate, estate assets may pass to unintended beneficiaries. What does this mean? This means that assets passing through probate are distributed in one of two ways. If a decedent has created a will prior to death indicating to whom that person wants his or her assets to pass, the decedent’s assets will pass to the person or persons they have named in the will to receive the assets. On the other hand, if the decedent did not prepare a will prior to death, the assets will pass according to the laws of intestate succession for the particular state in which the decedent lives at the time of his or her death. State law may require distribution of assets in a manner that is inconsistent with the way the decedent would have preferred his or her assets to pass.
Many of you probably have heard a horror story or two about the probate process. If you can take steps while you are alive to avoid probate, in most cases it makes sense to do so. Making sure you have beneficiaries designated for your Accounts is an easy way to ensure this happens. If you have any questions about your beneficiary designations, please contact us.