The Importance of Beneficiary Designations to Your Estate Plan

CAUTION! Your Beneficiary Designations on Bank Accounts, Life Insurance, and Other Assets May Defeat the Goals of Your Last Will

Do you own assets held in joint accounts, or where you have a named beneficiary?

If you have answered the above question, “yes” these assets will not be distributed in accordance with your Last Will. Instead, all joint assets will pass to the surviving joint owner, and all assets with a beneficiary designation will pass to that beneficiary.

If you have any joint accounts with one of your children, the assets in that account will pass to that one child at your death, regardless of what your Will might say, unless the account was set up as a convenience account whereupon it will be distributed according to your Last Will. You should carefully review the ownership and beneficiary designation(s) of all of your assets to be sure that the assets will be distributed to the right people at your death.

Are your residuary beneficiaries correct? Residuary beneficiaries are the people who receive the balance of your estate after (i) all the debts, expenses and taxes have been paid, (ii) any specific bequests have been made, and (iii) joint accounts or any assets with beneficiary designations have been distributed to the appropriate people. You should review these sections of your estate planning documents, especially your Last Will carefully. If one of the beneficiaries were to predecease you, will that beneficiary’s share pass to his or her children (your grandchildren), your other children, or otherwise? This is a very important point to discuss with your attorney.

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The Story of a Real-Life Disaster Caused by Not Focusing on Correct Beneficiary Designations

Several years ago, I reviewed a Last Will & Testimony of a husband who had died leaving a 401k.  This was a second marriage for the husband, who had two estranged sons from his first marriage.  While he was single, he changed the beneficiaries of his life insurance and 401k to his sons when their relationship was good.

After his second marriage, the husband and his new wife bought a home together.  They asked the real estate attorney who handled the purchase to draft a new will as well.  The husband listed the assets he still wanted to leave to his sons and which assets were to go to his wife.  He wanted his 401k to go to his wife.  Unfortunately, the attorney didn’t understand the difference between probate and non-probate assets.  When she wrote the will, she stated that the legal husband intended to give the 401k to his wife, but the attorney didn’t realize that the will would have no effect because the beneficiary designations on file with the custodian of the 401k plan listed the sons from the first marriage.

When the husband died, the wife received a big surprise when she was told that she had no interest in the $500,000 401(k).  Why?  Because a will doesn’t control the distribution of any of your assets with a beneficiary designation that does not name your estate.  Property such as life insurance, annuities and retirement accounts pass to the person you have designated on the beneficiary forms completed and filed with the life insurance and annuity company or retirement account custodian(s).  Other types of property also pass by operation of law such as jointly owned accounts with a right of survivorship including real estate and bank accounts are jointly owned by two or more people.  When the first owner of a joint account dies, the property automatically passes to the surviving co-owner.  It is irrelevant what the Last Will says.

That is what happened here.  The 401k passes to the named beneficiary according to the beneficiary designation form on file, not by the terms of the will.  The wife tried unsuccessfully to get a court order directing the funds to be paid to her.  She lost.

The takeaway from this advice is that although many people think drafting a will is simple and often undertake to do it by way of a “will kit” with legal zoom or some other legal stationery company, or ask an attorney to do a “simple will”, they may lose out big when their estate goes to someone other than their intended loved one.

The use of a properly written New Jersey will is a very good estate planning tool, but your beneficiary designations to you your assets must complement and not conflict with your estate planning objectives.

Not sure if your will, trust or beneficiary designations are correct? If you have any questions concerning this subject, contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291, or fniemann@hnlawfirm.com. He is happy to answer your inquiries.

 

 

 

Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Last Wills Attorney