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How beneficiary changes affect an estate plan

How beneficiary changes affect an estate plan

As an estate planning law firm, we cannot stress enough how important beneficiary designations are to the estate planning process. At first glance, people may not realize that a large portion of a person's wealth can be controlled by beneficiary designations. For example, a portion of a client's wealth may be controlled by beneficiary designations in the form of life insurance policies, bank accounts with payable on death designations, retirement accounts and investments.

A beneficiary is defined as a person or legal entity that is entitled to receive the proceeds of an estate, trust, retirement account, life insurance policy or bank account. A beneficiary can be an individual or it can be an entity such as a trust or a charity.

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Beneficiary designations are critical because when they are on retirement accounts or life insurance policies, they generally supersede instructions in wills, which is why it's so important to keep your beneficiary designations up-to-date. If you fail to periodically review your beneficiary designations on insurance policies, retirement accounts, and other financial accounts, when you pass, those assets can wind up in the wrong hands, thus resulting in an expensive and long-drawn out court battle for your loved ones, and there is no guarantee that they will prevail in court.

Periodically review your beneficiary designations

You should periodically review your beneficiary designations and possibly update them when:

  • You experience a major life event such as a birth, marriage, divorce, remarriage, or death in the family.
  • You update your estate plan.
  • You have a falling out with a child, a sibling or parent.
  • You roll over your 401(k) or Individual Retirement Account (IRA).

Some people will hire an attorney to put together an estate plan, and once those documents are drawn they will file them away in a drawer somewhere for safekeeping. Unfortunately, decades can slip by and the estate planning documents are long forgotten.

The same situation can occur when someone starts a new job and establishes their beneficiary designation on their 401(k). On too many occasions an employee names their spouse on their 401(k), only to be divorced and remarried years later. When such individuals forget to update their beneficiary designations upon divorce, and subsequently a remarriage, the surviving spouse can be in for a big, unpleasant surprise.

Beneficiary designations are a major component to an estate plan and they are extremely important. The main purpose of estate planning is to have control over your assets when you die, but failing to update beneficiary designations can undermine this very purpose and thwart your best efforts. Since a large portion of our clients' wealth is controlled by beneficiary designations, it's important to review designations made early in life, because they may not reflect your wishes today.

While a state statue may save the day on occasion, in other instances it may not. Make sure that you periodically review and update your beneficiary designations so your assets are distributed to whom you want, when you want.

To arrange a free consultation with a Santa Rosa estate planning attorney, contact The Law Office of Eric S. Gullotta today by calling 707.938.7234.

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