Darn those beneficiary designations.
They should be so simple. They are not.
A beneficiary designation is a “payable on death” or “transfer on death” designation. It allows an account owner to designate a person or entity to receive the account upon the owner’s death.
The advantages for using a beneficiary designation are well-known. The account passes outside of the court probate process. The owner can easily change the beneficiary designation at any time and without any consequence. For some retirement accounts, there is a tax advantage to designating a spouse or child.
So what makes beneficiary designations so difficult? There are four common problems.
First, most people designate their beneficiaries when the account is opened and then never think about it again. That can be a huge problem if their estate plan changes through, say, birth of another child, divorce, death of a beneficiary, or significant increase or decrease in wealth by the owner or the beneficiary. It could also be a problem if most of the owner’s wealth is accumulated in the account because it may not leave the owner’s probate estate with enough assets to pay taxes, debts and administration expenses.
Second, many married people who have an account solely in their individual name forget about spousal rights. In Texas, absent a written marital agreement, the portion in the account that was accumulated during marriage is owned one-half by each spouse. One spouse cannot cheat the other spouse out of that ownership right by designating a third party as a beneficiary.
Third, some people name a minor as an account beneficiary. This causes all sorts of havoc because a minor’s benefits cannot be paid directly to the minor or his parents. Instead, the institution can only pay the benefits to a court-appointed guardian of the minor’s estate or to a court-created management trust. That requires everyone to go through an additional expensive and burdensome court process.
Finally, many people will designate a beneficiary using vague wording. Consider this designation: “Jane Smith.” How the heck is the company supposed to know which Jane Smith? Better descriptions: Jane Smith DOB May 5, 1965; Jane Smith, Spouse of the Participant; Jane Smith, SSN xxx-xx-xxxx.
A few recommendations to make sure your beneficiary designations work:
Keep a spreadsheet showing each account and its beneficiary designation. Review your spreadsheet when a major life event happen, and change designations as necessary. If you change your estate plan, make sure you consider how it will be impacted by your beneficiary designations. Never name a minor as a beneficiary; instead, consider creating and naming a trust that benefits the minor.
Be very deliberate on the wording you use regarding your beneficiaries. Think through different scenarios. What is a beneficiary dies before you do? Do you name a contingent beneficiary?
Don’t be bullied: you do not have to fit the entire designation on those little lines in the institution’s account card. Instead, reference an “Exhibit A” and attach a sheet containing the complete beneficiary wording.
Contact Hammerle Finley Law Firm
Virginia Hammerle is a licensed Texas attorney. Her practice includes estate planning, litigation, guardianship and probate law. See hammerle.com for her blog and newsletter sign-up. This column does not constitute legal advice.