Estate planning is a multifaceted process that involves careful consideration of how your assets will be distributed after death. While many individuals focus on creating a will or a trust, it’s easy to overlook another essential component of holistic estate planning: beneficiary designations.
In this discussion, we will delve into the crucial role that beneficiary designations play in your Tennessee estate plan. We will specifically address how various accounts interact with your plan, including life insurance, retirement accounts, bank accounts, and investment accounts.
Additionally, we’ll address naming primary and contingent beneficiaries, unique considerations for minor children, and emphasize the importance of reviewing and updating these designations regularly.
What is a Beneficiary Designation?
Beneficiary designations dictate who will receive the proceeds of these accounts upon your passing. You specify on various financial and insurance accounts who that beneficiary will be.
Contrary to what many believe, these designations take precedence over your Last Will & Testament. This makes them a powerful tool in quickly directing the distribution of those assets. A beneficiary designation is a non-probate transfer. It happens quickly and outside the supervision of any court.
Without designating a beneficiary on these types of accounts, the assets may end up in the probate estate. The result is significant delays in getting the asset to your loved ones.
What Types of Assets Have Beneficiary Designations?
We will cover four common types of accounts that have beneficiary designations: life insurance, retirement accounts, bank accounts, and investment accounts.
- Life Insurance. This is an important component of many estate plans. It provides a financial safety net for your loved ones when you’re no longer there to support them. When you purchase a life insurance policy, you must name one or more beneficiaries to receive the death benefit. The death benefit passes to your named beneficiaries tax-free. If the policy has a cash-value, the insurance company often keeps this amount, though.
- Retirement Accounts. Tax-advantaged retirement plans, such as your 401(k) and IRA, typically include beneficiary designations. The purpose of these accounts is to replace your working income in retirement years. But the beneficiary designation determines what happens to the remaining funds after death. For a 401(k), the default beneficiary is your spouse. Only a spouse can waive this, and it must be in writing. For IRAs and other retirement accounts, you must tell the custodial institution who the beneficiary will be.
- Bank Accounts. Checking and savings accounts hold liquid cash that we use to pay our bills or save for various goals. These accounts are usually in our sole name or have joint ownership with a spouse. For jointly-owned accounts, ownership automatically passes to the survivor. But the person you designate as the payable-on-death (POD) beneficiary will receive the account balance at the time of your death.
- Investment Accounts. If you hold securities in a brokerage investment account, chances are the account has a transfer-on-death (TOD) designation available. That person will receive the assets held in that account, as well as getting a step-up in tax basis. Efficient transfer of investment accounts is important, as market volatility may require swift action that probate would otherwise make difficult.
Naming Your Beneficiaries
Accounts that have a beneficiary designation usually have primary and contingent options. The primary beneficiary is who will receive that asset upon your death. But life doesn’t always go according to plan, and the ones we plan on leaving assets to may predecease us. The contingent beneficiary is the backup if that happens.
You generally have the option of naming one or multiple beneficiaries on a given account. Spouses usually name each other as primary beneficiaries. Unmarried people will usually name a close family member. If you have multiple children, you may wish to distribute these assets equally, and can indicate so on the beneficiary designation forms.
If a revocable living trust is part of your estate plan, naming the trust as the beneficiary may be a good option. But this is not always the case, so having trusted legal counsel is important to determine how to incorporate your trust into beneficiary designations.
It’s essential to review and update these designations periodically to ensure they align with your current wishes. This is especially so when life events like marriages, divorces, or births occur. The last thing we want to see is a bitter ex-spouse get the entire balance of your retirement account or life insurance policy because you forgot to make a few simple changes.
Considerations for Minor Children
Naming minor children as beneficiaries raises unique considerations. While you may want to leave assets to your children, minors cannot directly inherit assets in their own name.
Instead, you may opt to establish a trust. This can be either in your will (a testamentary trust) or as a separate entity (a revocable living trust). The trust will hold and manage the assets on behalf of your minor children.
At Connell Law, PLLC, we often advise using the living trust. But each client’s situation has unique considerations that we take into account.
Alternatively, you may designate a custodian under the Tennessee Uniform Transfer to Minors Act (UTMA) to manage these assets for the minor’s benefit. Most states allow for an UTMA to hold property for the minor until age 21. In Tennessee, you may create an UTMA that holds property until the minor reaches age 25. Tenn. Code Ann. § 35-7-121.
Final Thoughts on Beneficiary Designations in Your Estate Plan
Comprehensive estate planning is not just about wills and trusts. Beneficiary designations play a pivotal role in ensuring that your wishes determine where your assets go. They also avoid the burdensome probate process.
By properly naming primary and contingent beneficiaries, considering minor children’s needs, and vigilantly reviewing and updating these designations, you can make your estate plan more effective and reduce the potential for unintended conflicts.
For assistance creating or updating your estate plan, including your beneficiary designations, reach out to Connell Law, PLLC today for a free consultation. We’ll help you plan today for a more peaceful tomorrow.