The Importance of Designated Beneficiaries in Estate Planning

Many people assume that when they have a will or trust drawn up by an attorney, that those estate planning documents control all of their assets and that those assets will then, automatically, avoid probate court. The truth is that getting your legal documents in order is only one part of the estate planning journey. It is also important to review — and update, as necessary — your beneficiary designations on things like retirement accounts, life insurance, annuities, bank accounts, and investments.

Understanding How Beneficiary Designations Work

You can name a beneficiary on nearly any type of asset. If you have an employer-sponsored retirement account, life insurance policy, or annuity contract, naming beneficiaries is generally part of the account opening process. You can also name “pay on death” (POD) beneficiaries on your checking and savings accounts and “transfer on death” (TOD) beneficiaries on investment accounts by asking your financial services providers to add that information to your accounts.

When you name a beneficiary directly with an insurance or financial provider, you are in essence entering into a contract with that provider. The company agrees to pay your named beneficiary the value of your policy or account when you die, and such payments generally take place without having to first go through probate court. Because of this, using beneficiary designations means your loved ones should receive the proceeds relatively quickly after submitting a death certificate and company-specific claims paperwork.

Your Beneficiary Designations Supersede Your Estate Planning Documents

What many people don’t realize is that assets with beneficiary designations pass completely independently of your will or trust, unless you make them work together. Let’s look at an example to illustrate this:

Joan had a falling out with one of her children. She changed her life insurance beneficiary designation to name her other child as the sole primary beneficiary. Years later, she had a change of heart, so she updated her revocable trust to state that her assets should pass to her two children in equal shares.

When Joan died though, only the assets inside her revocable trust passed 50/50; the life insurance policy proceeds were distributed to the one designated beneficiary named on file with the insurance company.

Joan could have avoided this outcome by filing an updated beneficiary designation with the insurer naming both children as her beneficiaries, or by naming her revocable trust as the sole designated beneficiary of policy proceeds.

Beneficiary Considerations After Divorce

There are also some special considerations if you are divorced. Once your divorce is finalized, you should update your estate plan, including your beneficiary designations as applicable, to ensure your assets pass according to your wishes.

Florida law provides that if you name a spouse as a beneficiary on an insurance or investment account or in your estate planning documents but later divorce, your ex-spouse will not inherit when you die. In effect, the state treats your ex-spouse as if they predeceased you. This law is designed as a protection for divorced Floridians who don’t get around to updating their beneficiary designations before they die, under the assumption that the deceased person would not have wanted assets to pass to their former spouse. In this scenario, if you have named one or more successor/alternate beneficiaries, that is who will inherit. If there is not a named successor beneficiary, then the assets will need to go through probate court before being distributed.

In certain cases, divorced spouses want to intentionally name each other as beneficiaries of life insurance policies or other assets, to meet stipulations in their divorce decrees. If your spouse was already named as the beneficiary of your insurance policy, it is easy to assume that you don’t need to do anything. However, because of the Florida law provision that treats a divorced spouse as a pre-deceased spouse, it is critical that you reaffirm your beneficiary designation after the divorce.

Are Your Estate Planning Documents and Beneficiary Designations Up-to-Date?

Creating and updating your estate plan, including beneficiary designations, can give you and your loved ones valuable peace of mind knowing that your wishes will be honored when you die.

To learn more and to schedule an appointment, contact the Judy-Ann Smith Law Firm in Jacksonville today.