Why Beneficiary Designations Can Override Your Will

Many people assume that a will controls everything they own. In reality, beneficiary designations and ownership arrangements often determine who receives some of the largest assets in an estate. THE CONTRACT USUALLY CONTROLS. Life insurance, retirement accounts, annuities, payable-on-death accounts, and transfer-on-death registrations generally pass according to the designation on file with the financial institution. A will ordinarily cannot redirect an account that has a valid beneficiary. COMMON PROBLEMS. Old designations may still name a former spouse, a deceased relative, or one child while omitting another. Naming the estate can create unnecessary probate administration and may produce unfavorable tax results for retirement assets. Naming a minor directly may require a custodian or court-supervised arrangement. TRUSTS AS BENEFICIARIES. A trust can provide continuing management, creditor protection, or staged distributions, but it should not be named casually. Retirement-account rules are technical, and the tax result may depend on the type of trust, its beneficiaries, and the account owner’s circumstances. DIVORCE AND STATE LAW. Illinois, Minnesota, and Wisconsin each have statutes that may revoke or affect certain transfers to a former spouse after divorce. Those rules are not a substitute for updating account forms. Federal law and plan documents may also affect employer-sponsored benefits. The safest practice is to make deliberate updates instead of relying on a revocation statute. A SIMPLE REVIEW PROCESS. List every retirement account, insurance policy, annuity, bank account, brokerage account, and jointly owned asset. Record the primary and contingent beneficiaries. Then compare those designations with the will and trust. Review the list after a marriage, divorce, birth, death, move, or major financial change. THE BOTTOM LINE. An estate plan works only when documents, ownership, and beneficiary forms point in the same direction. A well-drafted will cannot fix an inconsistent designation after death. This article provides general educational information and is not legal advice. Consult a qualified attorney and tax adviser about your specific circumstances.