Properly designating beneficiaries for assets that transfer on death is one of the simplest, and most commonly overlooked, methods to maximize the efficiency of a client’s estate plan. As a recent post on the New York Estate Planning Lawyer Blog notes, one of the main functions of an estate plan is the distribution of assets on death. By taking advantage of the ability to name beneficiaries for certain assets, namely bank accounts, insurance policies and retirement accounts, a planner can ensure that these items are transferred to the intended party in the most expeditious manner possible.
Achieving max asset distribution efficiency in an estate plan means avoiding probate. Though we’ve discussed how probate is generally not as bad as it seems, it’s still a time consuming process. Designated assets transfer similarly to those that are held in trust in that they aren’t subject to probate. A client can even achieve some degree of flexibility by naming multiple beneficiaries and determining the proportion in which the assets are distributed to each. That being said, beneficiary designations are just one part of an estate plan—though they occasionally act similarly to more sophisticated vehicles, their scope is more limited (and they offer none of the tax-saving benefits). The main allure of beneficiary designations lies in their simplicity. To take advantage of them, a client usually just has to include some extra information in the forms that he’s already filling out.
Beneficiary designations mostly come in three flavors: Primary, contingent and default. Naming an individual to act in each of these capacities effectively serves as a series of fail-safes whereby if the first in line isn’t able to take the asset, then it moves on to the next. The primary beneficiary takes precedence, then the contingent and, although it shouldn't be necessary if proper care is taken, the default beneficiary exists to take the asset in the event none of the other beneficiaries can. Because they act as a safety net, default beneficiaries are often legal entities, vehicles or accounts, such as a trust or charity, rather than people. They have to be able to outlast all of the other named beneficiaries to actually perform their intended function.
Though they are simple to set up, beneficiary designations also can be easy to mess up, mostly through carelessness. Often, setting up a designation is almost completely idiot-proof, your client just writes in someone’s name and what percentage he should get in the corresponding blank spaces on a form. However, it’s important to be as clear as possible when doing so to avoid confusion. Remember that the client won’t be there to explain which “Bob Smith” he meant, for example, when it’s time to act on the designations.
Furthermore, for those that do take the time to set up beneficiary designations, one of the most common points of failure is not subjecting them to proper periodic review. Any number of life events can cause an old, perhaps forgotten designation to become unpalatable. If your client gets divorced, has a falling out with a friend or relative or the named beneficiary dies before the client, the designation must be revisited and updated or else it will either result in the assets gong to someone that the client no longer intended to receive them or, in the worst case scenario, the designation will fail. Changing a designation, just like creating one, is generally extremely easy, but as mentioned above, with this ease can come complacency, which can lead to easily avoidable errors.
If an advisor can assist his clients in avoiding this flippancy, beneficiary designations can have outsized positive impact on an estate plan relative to the time and effort required to create and maintain them.